UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 25, 2018
Commission file number: 1-11437
LOCKHEED MARTIN CORPORATION
(Exact name of registrant as specified in its charter)
Maryland | 52-1893632 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
6801 Rockledge Drive, Bethesda, Maryland | 20817 | |
(Address of principal executive offices) | (Zip Code) | |
(301) 897-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non–accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
There were 285,529,483 shares of our common stock, $1 par value per share, outstanding as of March 25, 2018.
Lockheed Martin Corporation
Form 10-Q
For the Quarterly Period Ended March 25, 2018
Table of Contents
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ITEM 6. | |||
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Lockheed Martin Corporation
Consolidated Statements of Earnings
(unaudited; in millions, except per share data)
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Net sales | ||||||||||
Products | $ | 9,762 | $ | 9,613 | ||||||
Services | 1,873 | 1,599 | ||||||||
Total net sales | 11,635 | 11,212 | ||||||||
Cost of sales | ||||||||||
Products | (8,697 | ) | (8,744 | ) | ||||||
Services | (1,689 | ) | (1,434 | ) | ||||||
Other unallocated, net | 409 | 372 | ||||||||
Total cost of sales | (9,977 | ) | (9,806 | ) | ||||||
Gross profit | 1,658 | 1,406 | ||||||||
Other income (expense), net | 67 | (4 | ) | |||||||
Operating profit | 1,725 | 1,402 | ||||||||
Interest expense | (155 | ) | (155 | ) | ||||||
Other non-operating expense, net | (210 | ) | (212 | ) | ||||||
Earnings before income taxes | 1,360 | 1,035 | ||||||||
Income tax expense | (203 | ) | (246 | ) | ||||||
Net earnings | $ | 1,157 | $ | 789 | ||||||
Earnings per common share | ||||||||||
Basic | $ | 4.05 | $ | 2.72 | ||||||
Diluted | $ | 4.02 | $ | 2.69 | ||||||
Cash dividends paid per common share | $ | 2.00 | $ | 1.82 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Lockheed Martin Corporation
Consolidated Statements of Comprehensive Income
(unaudited; in millions)
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Net earnings | $ | 1,157 | $ | 789 | ||||||
Other comprehensive income, net of tax | ||||||||||
Postretirement benefit plans | ||||||||||
Amounts reclassified from accumulated other comprehensive loss | 300 | 202 | ||||||||
Other comprehensive gain recognized during the period | — | 3 | ||||||||
Other, net | 58 | 5 | ||||||||
Other comprehensive income, net of tax | 358 | 210 | ||||||||
Comprehensive income | $ | 1,515 | $ | 999 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Lockheed Martin Corporation
Consolidated Balance Sheets
(unaudited; in millions, except par value)
March 25, 2018 | December 31, 2017 | |||||||||
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 2,393 | $ | 2,861 | ||||||
Receivables, net | 2,373 | 2,265 | ||||||||
Contract assets | 9,405 | 7,992 | ||||||||
Inventories | 3,196 | 2,878 | ||||||||
Other current assets | 449 | 1,509 | ||||||||
Total current assets | 17,816 | 17,505 | ||||||||
Property, plant and equipment, net | 5,749 | 5,775 | ||||||||
Goodwill | 10,806 | 10,807 | ||||||||
Intangible assets, net | 3,730 | 3,797 | ||||||||
Deferred income taxes | 3,084 | 3,156 | ||||||||
Other noncurrent assets | 5,449 | 5,580 | ||||||||
Total assets | $ | 46,634 | $ | 46,620 | ||||||
Liabilities and equity | ||||||||||
Current liabilities | ||||||||||
Accounts payable | $ | 2,715 | $ | 1,467 | ||||||
Contract liabilities | 6,550 | 7,028 | ||||||||
Salaries, benefits and payroll taxes | 1,771 | 1,785 | ||||||||
Current maturities of long-term debt | 750 | 750 | ||||||||
Other current liabilities | 2,188 | 1,883 | ||||||||
Total current liabilities | 13,974 | 12,913 | ||||||||
Long-term debt, net | 13,473 | 13,513 | ||||||||
Accrued pension liabilities | 14,199 | 15,703 | ||||||||
Other postretirement benefit liabilities | 713 | 719 | ||||||||
Other noncurrent liabilities | 4,386 | 4,548 | ||||||||
Total liabilities | 46,745 | 47,396 | ||||||||
Stockholders’ equity | ||||||||||
Common stock, $1 par value per share | 284 | 284 | ||||||||
Additional paid-in capital | — | — | ||||||||
Retained earnings | 14,123 | 11,405 | ||||||||
Accumulated other comprehensive loss | (14,589 | ) | (12,539 | ) | ||||||
Total stockholders’ deficit | (182 | ) | (850 | ) | ||||||
Noncontrolling interests in subsidiary | 71 | 74 | ||||||||
Total deficit | (111 | ) | (776 | ) | ||||||
Total liabilities and equity | $ | 46,634 | $ | 46,620 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
Lockheed Martin Corporation
Consolidated Statements of Cash Flows
(unaudited; in millions)
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Operating activities | ||||||||||
Net earnings | $ | 1,157 | $ | 789 | ||||||
Adjustments to reconcile net earnings to net cash provided by operating activities | ||||||||||
Depreciation and amortization | 279 | 285 | ||||||||
Stock-based compensation | 38 | 44 | ||||||||
Changes in assets and liabilities | ||||||||||
Receivables, net | (108 | ) | (799 | ) | ||||||
Contract assets | (1,413 | ) | (62 | ) | ||||||
Inventories | (318 | ) | (225 | ) | ||||||
Accounts payable | 1,290 | 1,111 | ||||||||
Contract liabilities | (478 | ) | (185 | ) | ||||||
Postretirement benefit plans | (1,145 | ) | 345 | |||||||
Income taxes | 1,064 | 175 | ||||||||
Other, net | 266 | 188 | ||||||||
Net cash provided by operating activities | 632 | 1,666 | ||||||||
Investing activities | ||||||||||
Capital expenditures | (216 | ) | (170 | ) | ||||||
Other, net | 130 | 4 | ||||||||
Net cash used for investing activities | (86 | ) | (166 | ) | ||||||
Financing activities | ||||||||||
Repurchases of common stock | (300 | ) | (500 | ) | ||||||
Dividends paid | (586 | ) | (544 | ) | ||||||
Proceeds from stock option exercises | 33 | 31 | ||||||||
Other, net | (161 | ) | (108 | ) | ||||||
Net cash used for financing activities | (1,014 | ) | (1,121 | ) | ||||||
Net change in cash and cash equivalents | (468 | ) | 379 | |||||||
Cash and cash equivalents at beginning of period | 2,861 | 1,837 | ||||||||
Cash and cash equivalents at end of period | $ | 2,393 | $ | 2,216 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
Lockheed Martin Corporation
Consolidated Statements of Equity
(unaudited; in millions)
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ (Deficit) Equity | Noncontrolling Interests in Subsidiary | Total (Deficit) Equity | ||||||||||||||||||
Balance at December 31, 2017 | $ | 284 | $ | — | $ | 11,405 | $ | (12,539 | ) | $ | (850 | ) | $ | 74 | $ | (776 | ) | |||||||
Net earnings | — | — | 1,157 | — | 1,157 | — | 1,157 | |||||||||||||||||
Other comprehensive income, net of tax | — | — | — | 358 | 358 | — | 358 | |||||||||||||||||
Repurchases of common stock | (1 | ) | (25 | ) | (274 | ) | — | (300 | ) | — | (300 | ) | ||||||||||||
Dividends declared | — | — | (573 | ) | — | (573 | ) | — | (573 | ) | ||||||||||||||
Stock-based awards, ESOP activity and other | 1 | 25 | — | — | 26 | — | 26 | |||||||||||||||||
Reclassification of income tax effects from tax reform | — | — | 2,408 | (2,408 | ) | — | — | — | ||||||||||||||||
Net decrease in noncontrolling interests in subsidiary | — | — | — | — | — | (3 | ) | (3 | ) | |||||||||||||||
Balance at March 25, 2018 | $ | 284 | $ | — | $ | 14,123 | $ | (14,589 | ) | $ | (182 | ) | $ | 71 | $ | (111 | ) | |||||||
Balance at December 31, 2016 | $ | 289 | $ | — | $ | 13,195 | $ | (12,102 | ) | $ | 1,382 | $ | 95 | $ | 1,477 | |||||||||
Net earnings | — | — | 789 | — | 789 | — | 789 | |||||||||||||||||
Other comprehensive income, net of tax | — | — | — | 210 | 210 | — | 210 | |||||||||||||||||
Repurchases of common stock | (2 | ) | (29 | ) | (469 | ) | — | (500 | ) | — | (500 | ) | ||||||||||||
Dividends declared | — | — | (531 | ) | — | (531 | ) | — | (531 | ) | ||||||||||||||
Stock-based awards, ESOP activity and other | 1 | 29 | — | — | 30 | — | 30 | |||||||||||||||||
Net increase in noncontrolling interests in subsidiary | — | — | — | — | — | 7 | 7 | |||||||||||||||||
Balance at March 26, 2017 | $ | 288 | $ | — | $ | 12,984 | $ | (11,892 | ) | $ | 1,380 | $ | 102 | $ | 1,482 | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
NOTE 1 – BASIS OF PRESENTATION
We prepared these consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of U.S. Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of management, these consolidated financial statements reflect all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations, financial condition and cash flows for the interim periods presented. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our consolidated financial statements include, but are not limited to, accounting for sales and cost recognition, postretirement benefit plans, environmental receivables and liabilities, evaluation of goodwill and other assets for impairment, income taxes including deferred tax assets, fair value measurements and contingencies. The consolidated financial statements include the accounts of subsidiaries we control and variable interest entities if we are the primary beneficiary. We eliminate intercompany balances and transactions in consolidation.
We close our books and records on the last Sunday of the calendar quarter, which was on March 25 for the first quarter of 2018 and March 26 for the first quarter of 2017, to align our financial closing with our business processes. The consolidated financial statements and tables of financial information included herein are labeled based on that convention. This practice only affects interim periods as our fiscal year ends on December 31.
Effective January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (Topic 606) (commonly referred to as ASC 606), which changed the way we recognize revenue for certain contracts and significantly expanded disclosures about revenue recognition. In addition, effective January 1, 2018, we adopted ASU 2017-07, Compensation-Retirement Benefits, which changed the statement of earnings presentation of certain components of FAS pension and other postretirement benefit plan expense. The amounts for all periods presented in this Form 10-Q have been adjusted to reflect the new methods of accounting. See “Note 12 – Recent Accounting Pronouncements” for more information regarding the adoption of these standards.
Other than the changes in our accounting policies related to revenue recognition and the classification of certain components of FAS pension and other postretirement benefit plan expense, we followed the accounting policies disclosed in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K) filed with the SEC.
The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full year or future periods. Unless otherwise noted, we present all per share amounts cited in these consolidated financial statements on a “per diluted share” basis. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2017 Form 10-K.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICY UPDATES
As described in “Note 1 – Basis of Presentation” and “Note 12 – Recent Accounting Pronouncements,” effective January 1, 2018, we adopted ASC 606, which changed the way we recognize revenue for certain contracts. Accounting policies that were significantly affected by the adoption of ASC 606 are discussed below.
Revenue Recognition
The majority of our net sales are generated from long-term contracts with the U.S. Government and international customers (including foreign military sales (FMS) contracted through the U.S. Government) for the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We provide our products and services under fixed-price and cost-reimbursable contracts.
8
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Some fixed-price contracts have a performance-based component under which we may earn incentive payments or incur financial penalties based on our performance.
Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract plus a fee up to a ceiling based on the amount that has been funded. Typically, we enter into three types of cost-reimbursable contracts: cost-plus-award-fee, cost-plus-incentive-fee, and cost-plus-fixed-fee. Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical and schedule criteria. Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee, which is adjusted by a formula based on the relationship of total allowable costs to total target costs (i.e., incentive based on cost) or reimbursement of costs plus an incentive to exceed stated performance targets (i.e., incentive based on performance). The fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed-fee does not vary with actual costs.
We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.
We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The products and services in our contracts are typically not distinct from one another due to their complex relationships and the significant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as one performance obligation. In limited cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities that are not highly complex or interrelated or involve different product lifecycles. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded in a given period. We classify net sales as products or services on our consolidated statements of earnings based on the predominant attributes of the performance obligations.
We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. For contracts where a portion of the price may vary we estimate variable consideration at the most likely amount, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. We analyze the risk of a significant revenue reversal and if necessary constrain the amount of variable consideration recognized in order to mitigate this risk.
At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable. Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such modifications are accounted for as if they were part of the existing contract and recognized as a cumulative adjustment to revenue.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis (i.e., not bundled with any other products or services). Our contracts with the U.S. Government, including FMS contracts, are subject to the Federal Acquisition Regulations (FAR) and the price is typically based on estimated or actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or services in our contracts with the U.S. Government and FMS contracts are typically equal to the selling price stated in the contract. Therefore, we typically do not need to allocate (or reallocate) the transaction price to multiple performance obligations.
9
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
For non-U.S. Government contracts with multiple performance obligations, we evaluate whether the stated selling prices for the products or services represent their standalone selling prices. We primarily sell customized solutions unique to a customer’s specifications. When it is necessary to allocate the transaction price to multiple performance obligations, we typically use the expected cost plus a reasonable profit margin to estimate the standalone selling price of each product or service. We occasionally sell standard products or services with observable standalone sales transactions. In these situations, the observable standalone sales transactions are used to determine the standalone selling price.
We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of our revenue is recognized over a period of time as we perform under the contract because control of the work in process transfers continuously to the customer. For contracts with the U.S. Government and FMS contracts, this continuous transfer of control of the work in process to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit, and take control of any work in process. Our non-U.S. Government contracts, primarily international direct commercial contracts, typically do not include termination for convenience provisions. However, continuous transfer of control to our customer is supported as, if our customer were to terminate the contract for reasons other than our non-performance, we would have the right to recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to us.
For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the percentage-of-completion cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation(s). For performance obligations to provide services to the customer, revenue is recognized over a period of time based on costs incurred or the right to invoice method (in situations where the value transferred matches our billing rights) as our customer receives and consumes the benefits.
For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point.
Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and considers the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers may be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of March 25, 2018, our ending backlog was $104.8 billion. We expect to recognize approximately 40% over the next 12 months and approximately 65% over the next 24 months as revenue, with the remainder recognized thereafter.
For arrangements with the U.S. Government and FMS contracts, we generally do not begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. Typical payment terms under fixed-price contracts with the U.S. Government provide that the customer pays either performance-based payments (PBPs) based on the achievement of contract milestones or progress payments based on a percentage of costs we incur. For the majority of our international direct commercial contracts to deliver complex systems, we typically receive advance payments prior to commencement of work, as well as milestone payments that are paid in accordance with the terms of our contract as we perform. We recognize a liability for payments in excess of revenue recognized, which is presented as a contract liability on the balance sheet. The portion of payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer from our failure to adequately complete some or all of the obligations under the contract. Payments received from customers in advance of revenue recognition
10
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract.
For fixed-price and cost-reimbursable contracts, we present revenues recognized in excess of billings as contract assets on the balance sheet. Amounts billed and due from our customers under both contract types are classified as receivables on the balance sheet.
Significant estimates and assumptions are made in estimating contract sales and costs, including the profit booking rate. At the outset of a long-term contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract, as well as variable consideration, and assess the effects of those risks on our estimates of sales and total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead, general and administrative and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract or may increase the variable consideration we expect to receive on the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase or our estimates of variable consideration we expect to receive decrease. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. When estimates of total costs to be incurred on a contract exceed total estimates of the transaction price, a provision for the entire loss is determined at the contract level and is recorded in the period in which the loss is determined.
Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts for which we recognize revenue over a period of time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate, resulting in an increase in the estimated total costs to fulfill the performance obligations and a reduction in the profit booking rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other items, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions, which are excluded from segment operating results; reserves for disputes; certain asset impairments; and losses on sales of certain assets.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, increased segment operating profit by approximately $420 million and $295 million during the quarters ended March 25, 2018 and March 26, 2017. These adjustments increased net earnings by approximately $332 million ($1.15 per share) and $192 million ($0.66 per share) during the quarters ended March 25, 2018 and March 26, 2017. During the quarters ended March 25, 2018 and March 26, 2017, we recognized net sales from performance obligations satisfied in prior periods of approximately $415 million and $380 million, which primarily relate to changes in profit booking rates that impacted revenue.
We have a program, EADGE-T, to design, integrate, and install an air missile defense command, control, communications, computers – intelligence (C4I) systems for an international customer that has experienced performance matters and for which we have periodically accrued reserves. During the quarter ended March 26, 2017, we revised our estimated costs to complete the EADGE-T contract as a consequence of ongoing performance matters and recorded an additional charge of $120 million ($74 million or $0.25 per share, after tax) at our Rotary and Mission Systems (RMS) business segment. As of March 25, 2018, cumulative losses remained at approximately $260 million on this program. We are continuing to monitor program requirements and our performance and could record additional charges in future periods. However, based on the reserves already accrued and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional charges, if any, would be material.
11
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
We have two commercial satellite programs at our Space business segment, for which we have experienced performance issues related to the development and integration of a modernized LM 2100 satellite platform. These commercial programs require the development of new satellite technology to enhance the LM 2100’s power, propulsion and electronics, among other items. The enhanced satellite is expected to benefit other commercial and government satellite programs. We have periodically revised our estimated costs to complete these developmental commercial programs. We have recorded cumulative losses of approximately $340 million through March 25, 2018. During the quarter ended March 25, 2018, we recorded losses of approximately $35 million ($26 million or $0.09 per share, after tax). While these losses reflect our estimated total losses on the programs, we will continue to incur unrecovered costs each period until we complete these programs and may have to record additional loss reserves in future periods, which could be material to our operating results. These programs remain developmental and further challenges in the delivery and integration of new satellite technology, anomalies discovered during system testing requiring repair or rework, further schedule delays and potential penalties could require that we record additional reserves. Currently, we do not expect to be able to meet the delivery schedule under the contracts and have informed the customers. The customers could seek to exercise a termination right under the contracts, in which case we would have to refund the payments we have received and pay certain penalties. However, we think the probability that the customers will seek to exercise any termination right is remote as the delay beyond the termination date is modest and the customers have an immediate need for the satellites.
Receivables, Net
Receivables, net represent our unconditional right to consideration under the contract and include amounts billed and currently due from customers. The amounts are stated at their net estimated realizable value. There were no significant impairment losses related to our receivables during the quarters ended March 25, 2018 and March 26, 2017.
On occasion, our customers may seek deferred payment terms to purchase our products. In connection with these transactions, we may, at our customer’s request, enter into arrangements for the non-recourse sale of customer receivables to unrelated third–party financial institutions. For accounting purposes, these transactions are not discounted and are treated as a sale of receivables as we have no continuing involvement. The sale proceeds from the financial institutions are reflected in our operating cash flows on the statement of cash flows. During the quarter ended March 25, 2018, we sold approximately $103 million of customer receivables. There were no gains or losses related to sales of these receivables.
Contract Assets
Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. The amounts may not exceed their estimated net realizable value. Contract assets are classified as current based on our contract operating cycle.
Inventories
We record inventories at the lower of cost or estimated net realizable value. If events or changes in circumstances indicate that the utility of our inventories have diminished through damage, deterioration, obsolescence, changes in price or other causes, a loss is recognized in the period in which it occurs. We capitalize labor, material, subcontractor and overhead costs as work-in-process for contracts where control has not yet passed to the customer. In addition, we capitalize costs to fulfill incurred in advance of contract award in inventories as work-in-process if we determine that contract award is probable. We determine the costs of other product and supply inventories by using the first-in first-out or average cost methods.
Contract Liabilities
Contract liabilities (formerly referred to as customer advances and amounts in excess of costs incurred) include advance payments and billings in excess of revenue recognized. Contract liabilities are classified as current liabilities based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.
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Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
NOTE 3 – EARNINGS PER COMMON SHARE
The weighted average number of shares outstanding used to compute earnings per common share were as follows (in millions):
Quarters Ended | ||||||||
March 25, 2018 | March 26, 2017 | |||||||
Weighted average common shares outstanding for basic computations | 285.5 | 290.0 | ||||||
Weighted average dilutive effect of equity awards | 2.4 | 2.8 | ||||||
Weighted average common shares outstanding for diluted computations | 287.9 | 292.8 | ||||||
We compute basic and diluted earnings per common share by dividing net earnings by the respective weighted average number of common shares outstanding for the periods presented. Our calculation of diluted earnings per common share also includes the dilutive effects for the assumed vesting of outstanding restricted stock units (RSUs) and performance stock units (PSUs) and exercise of outstanding stock options based on the treasury stock method. There were no significant anti-dilutive equity awards during the quarters ended March 25, 2018 or March 26, 2017.
NOTE 4 – INFORMATION ON BUSINESS SEGMENTS
We operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), RMS and Space. We organize our business segments based on the nature of the products and services offered.
Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation. Operating profit of our business segments includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments. In addition, operating profit of our business segments includes total pension costs recoverable on U.S. Government contracts as determined in accordance with U.S. Government cost accounting standards (CAS). Operating profit of the business segments excludes the FAS/CAS operating adjustment; expense for stock-based compensation; the effects of items not considered part of management’s evaluation of segment operating performance, such as charges related to significant severance actions and certain asset impairments; gains or losses from significant divestitures; the effects of certain legal settlements; corporate costs not allocated to our business segments; and other miscellaneous corporate activities. These items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 2 – Significant Accounting Policy Updates” for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.
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Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Summary operating results for each of our business segments were as follows (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Net sales | ||||||||||
Aeronautics | $ | 4,398 | $ | 4,120 | ||||||
Missiles and Fire Control | 1,677 | 1,549 | ||||||||
Rotary and Mission Systems | 3,223 | 3,127 | ||||||||
Space | 2,337 | 2,416 | ||||||||
Total net sales | $ | 11,635 | $ | 11,212 | ||||||
Operating profit | ||||||||||
Aeronautics | $ | 474 | $ | 439 | ||||||
Missiles and Fire Control | 261 | 234 | ||||||||
Rotary and Mission Systems (a) | 311 | 128 | ||||||||
Space | 264 | 290 | ||||||||
Total business segment operating profit | 1,310 | 1,091 | ||||||||
Unallocated items | ||||||||||
FAS/CAS operating adjustment (b) | 451 | 403 | ||||||||
Stock-based compensation | (38 | ) | (44 | ) | ||||||
Other, net (c) | 2 | (48 | ) | |||||||
Total unallocated items | 415 | 311 | ||||||||
Total consolidated operating profit | $ | 1,725 | $ | 1,402 | ||||||
Intersegment sales | ||||||||||
Aeronautics | $ | 25 | $ | 25 | ||||||
Missiles and Fire Control | 95 | 73 | ||||||||
Rotary and Mission Systems | 461 | 445 | ||||||||
Space | 45 | 26 | ||||||||
Total intersegment sales | $ | 626 | $ | 569 | ||||||
(a) | During the first quarter of 2017, we revised the total estimated costs to complete the EADGE-T contract as a consequence of ongoing performance matters and recorded an additional reserve of $120 million ($74 million, or $0.25 per share, after tax) at our RMS business segment. |
(b) | The FAS/CAS operating adjustment represents the difference between the service cost component of U.S. GAAP financial accounting standards pension expense and total pension costs recoverable on U.S. Government contracts as determined in accordance with U.S. Government CAS. For a detail of the FAS/CAS operating adjustment and the total net FAS/CAS adjustment, see the table below. |
(c) | During the first quarter of 2017, we recognized a $64 million charge ($40 million, or $0.14 per share, after tax), which represents our portion of a non-cash asset impairment charge recorded by our equity method investee, Advanced Military Maintenance, Repair and Overhaul Center LLC (AMMROC). See “Note 11 – Other” (under the caption “Equity Method Investee Impairment”) for more information. |
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Notes to Consolidated Financial Statements (unaudited) (continued)
Our total FAS/CAS pension adjustment for the quarters ended March 25, 2018 and March 26, 2017, including the service and non-service cost components of FAS pension expense (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Total FAS expense and CAS costs | ||||||||||
FAS pension expense | $ | (356 | ) | $ | (345 | ) | ||||
Less: CAS pension cost | 608 | 562 | ||||||||
Net FAS/CAS pension adjustment | $ | 252 | $ | 217 | ||||||
Service and non-service cost reconciliation | ||||||||||
FAS pension service cost | $ | (157 | ) | $ | (159 | ) | ||||
Less: CAS pension cost | 608 | 562 | ||||||||
FAS/CAS operating adjustment | 451 | 403 | ||||||||
Non-operating FAS pension expense | (199 | ) | (186 | ) | ||||||
Net FAS/CAS pension adjustment | $ | 252 | $ | 217 | ||||||
We recover CAS pension cost through the pricing of our products and services on U.S. Government contracts and, therefore, recognize CAS pension cost in each of our business segments’ net sales and cost of sales. Our consolidated financial statements must present FAS pension and other postretirement benefit plan expense calculated in accordance with financial accounting standards (FAS) requirements under U.S. GAAP. The operating portion of the FAS/CAS adjustment represents the difference between the service cost component of FAS pension expense and CAS. The non-service FAS pension cost component is included in other non-operating expense, net. The net FAS/CAS pension adjustment increases or decreases CAS pension cost to equal total FAS pension cost (both service and non-service).
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Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Net sales by total products and services, contract type, customer category and geographic region for each of our business segments were as follows (in millions):
Quarter Ended March 25, 2018 | ||||||||||||||||||||
Aeronautics | MFC | RMS | Space | Total | ||||||||||||||||
Net sales | ||||||||||||||||||||
Products | $ | 3,770 | $ | 1,353 | $ | 2,717 | $ | 1,922 | $ | 9,762 | ||||||||||
Services | 628 | 324 | 506 | 415 | 1,873 | |||||||||||||||
Total net sales | $ | 4,398 | $ | 1,677 | $ | 3,223 | $ | 2,337 | $ | 11,635 | ||||||||||
Net sales by contract type | ||||||||||||||||||||
Fixed-price | $ | 3,215 | $ | 1,112 | $ | 2,208 | $ | 400 | $ | 6,935 | ||||||||||
Cost-reimbursable | 1,183 | 565 | 1,015 | 1,937 | 4,700 | |||||||||||||||
Total net sales | $ | 4,398 | $ | 1,677 | $ | 3,223 | $ | 2,337 | $ | 11,635 | ||||||||||
Net sales by customer | ||||||||||||||||||||
U.S. Government | $ | 2,765 | $ | 1,088 | $ | 2,356 | $ | 1,870 | $ | 8,079 | ||||||||||
International (a) | 1,577 | 554 | 781 | 456 | 3,368 | |||||||||||||||
U.S. commercial and other | 56 | 35 | 86 | 11 | 188 | |||||||||||||||
Total net sales | $ | 4,398 | $ | 1,677 | $ | 3,223 | $ | 2,337 | $ | 11,635 | ||||||||||
Net sales by geographic region | ||||||||||||||||||||
United States | $ | 2,821 | $ | 1,123 | $ | 2,442 | $ | 1,881 | $ | 8,267 | ||||||||||
Asia Pacific | 754 | 98 | 324 | 23 | 1,199 | |||||||||||||||
Europe | 508 | 69 | 155 | 426 | 1,158 | |||||||||||||||
Middle East | 257 | 380 | 171 | 7 | 815 | |||||||||||||||
Other | 58 | 7 | 131 | — | 196 | |||||||||||||||
Total net sales | $ | 4,398 | $ | 1,677 | $ | 3,223 | $ | 2,337 | $ | 11,635 | ||||||||||
(a) | International sales include FMS contracted through the U.S. Government and direct commercial sales to international governments and other international customers. |
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Notes to Consolidated Financial Statements (unaudited) (continued)
Quarter Ended March 26, 2017 | ||||||||||||||||||||
Aeronautics | MFC | RMS | Space | Total | ||||||||||||||||
Net sales | ||||||||||||||||||||
Products | $ | 3,634 | $ | 1,257 | $ | 2,648 | $ | 2,074 | $ | 9,613 | ||||||||||
Services | 486 | 292 | 479 | 342 | 1,599 | |||||||||||||||
Total net sales | $ | 4,120 | $ | 1,549 | $ | 3,127 | $ | 2,416 | $ | 11,212 | ||||||||||
Net sales by contract type | ||||||||||||||||||||
Fixed-price | $ | 2,916 | $ | 1,085 | $ | 2,236 | $ | 510 | $ | 6,747 | ||||||||||
Cost-reimbursable | 1,204 | 464 | 891 | 1,906 | 4,465 | |||||||||||||||
Total net sales | $ | 4,120 | $ | 1,549 | $ | 3,127 | $ | 2,416 | $ | 11,212 | ||||||||||
Net sales by customer | ||||||||||||||||||||
U.S. Government | $ | 2,683 | $ | 1,077 | $ | 2,295 | $ | 2,012 | $ | 8,067 | ||||||||||
International (a) | 1,403 | 445 | 771 | 390 | 3,009 | |||||||||||||||
U.S. commercial and other | 34 | 27 | 61 | 14 | 136 | |||||||||||||||
Total net sales | $ | 4,120 | $ | 1,549 | $ | 3,127 | $ | 2,416 | $ | 11,212 | ||||||||||
Net sales by geographic region | ||||||||||||||||||||
United States | $ | 2,717 | $ | 1,104 | $ | 2,356 | $ | 2,026 | $ | 8,203 | ||||||||||
Asia Pacific | 531 | 92 | 274 | 4 | 901 | |||||||||||||||
Europe | 503 | 75 | 202 | 334 | 1,114 | |||||||||||||||
Middle East | 335 | 270 | 110 | 52 | 767 | |||||||||||||||
Other | 34 | 8 | 185 | — | 227 | |||||||||||||||
Total net sales | $ | 4,120 | $ | 1,549 | $ | 3,127 | $ | 2,416 | $ | 11,212 | ||||||||||
(a) | International sales include FMS contracted through the U.S. Government and direct commercial sales to international governments and other international customers. |
Total assets for each of our business segments were as follows (in millions):
March 25, 2018 | December 31, 2017 | |||||||||
Assets | ||||||||||
Aeronautics | $ | 8,264 | $ | 7,713 | ||||||
Missiles and Fire Control | 4,704 | 4,577 | ||||||||
Rotary and Mission Systems | 19,034 | 18,292 | ||||||||
Space | 5,561 | 5,240 | ||||||||
Total business segment assets | 37,563 | 35,822 | ||||||||
Corporate assets (a) | 9,071 | 10,798 | ||||||||
Total assets | $ | 46,634 | $ | 46,620 | ||||||
(a) | Corporate assets primarily include cash and cash equivalents, deferred income taxes, environmental receivables, and investments held in a separate trust to fund certain of our non-qualified deferred compensation plans. |
Our Aeronautics business segment includes our largest program, the F-35 Lightning II Joint Strike Fighter, an international multi-role, multi-variant, stealth fighter aircraft. Net sales for the F-35 program represented approximately 24% of our total consolidated net sales for both the quarter ended March 25, 2018 and the quarter ended March 26, 2017.
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Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
NOTE 5 – CONTRACT ASSETS AND LIABILITIES
Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract liabilities (formerly referred to as customer advances and amounts in excess of costs incurred) include advance payments and billings in excess of revenue recognized. Contract assets and contract liabilities were as follows (in millions):
March 25, 2018 | December 31, 2017 | |||||||||
Contract assets | $ | 9,405 | $ | 7,992 | ||||||
Contract liabilities | 6,550 | 7,028 | ||||||||
Contract assets increased $1.4 billion during the quarter ended March 25, 2018, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the quarter ended March 25, 2018 for which we have not yet billed. There were no significant impairment losses related to our contract assets during the quarters ended March 25, 2018 and March 26, 2017.
Contract liabilities decreased $478 million during the quarter ended March 25, 2018, primarily due to revenue recognized in excess of payments received on these performance obligations. During the quarter ended March 25, 2018, we recognized $1.9 billion of our contract liabilities at December 31, 2017 as revenue. During the quarter ended March 26, 2017, we recognized $1.6 billion of our contract liabilities at December 31, 2016 as revenue.
NOTE 6 – INVENTORIES
Inventories consisted of the following (in millions):
March 25, 2018 | December 31, 2017 | |||||||||
Materials, spares and supplies | $ | 418 | $ | 563 | ||||||
Work-in-process | 2,298 | 1,823 | ||||||||
Finished goods | 480 | 492 | ||||||||
Total inventories | $ | 3,196 | $ | 2,878 | ||||||
Costs incurred to fulfill a contract in advance of the contract being awarded are included in inventories as work-in-process if we determine that those costs relate directly to a contract or to an anticipated contract that we can specifically identify and contract award is probable, the costs generate or enhance resources that will be used in satisfying performance obligations, and the costs are recoverable (referred to as pre-contract costs). Pre-contract costs that are initially capitalized in inventory are generally recognized as cost of sales consistent with the transfer of products and services to the customer upon the receipt of the anticipated contract. All other pre-contract costs, including start-up costs, are expensed as incurred. As of March 25, 2018 and December 31, 2017, $495 million and $466 million of pre-contract costs were included in inventory.
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Notes to Consolidated Financial Statements (unaudited) (continued)
NOTE 7 – POSTRETIREMENT BENEFIT PLANS
Our pretax net periodic benefit cost related to our qualified defined benefit pension plans and retiree medical and life insurance plans consisted of the following (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Qualified defined benefit pension plans | ||||||||||
Service cost | $ | 157 | $ | 159 | ||||||
Interest cost | 435 | 458 | ||||||||
Expected return on plan assets | (599 | ) | (562 | ) | ||||||
Recognized net actuarial losses | 444 | 376 | ||||||||
Amortization of prior service credits | (81 | ) | (86 | ) | ||||||
Total net periodic benefit cost | $ | 356 | $ | 345 | ||||||
Retiree medical and life insurance plans | ||||||||||
Service cost | $ | 5 | $ | 5 | ||||||
Interest cost | 23 | 26 | ||||||||
Expected return on plan assets | (34 | ) | (32 | ) | ||||||
Recognized net actuarial losses | 1 | 5 | ||||||||
Amortization of prior service costs | 4 | 3 | ||||||||
Total net periodic benefit (credit) cost | $ | (1 | ) | $ | 7 | |||||
We record the service cost component of net periodic benefit cost as part of cost of sales and the non-service cost components of net periodic benefit cost (i.e., interest cost, expected return on plan assets, net actuarial gains or losses, and amortization of prior service cost or credits) as part of other non-operating expense, net in the consolidated statements of earnings.
The recognized net actuarial losses and amortization of prior service (credits) costs in the table above, along with similar amounts related to our other postretirement benefit plans ($14 million for both the quarters ended March 25, 2018 and March 26, 2017), were reclassified from accumulated other comprehensive loss (AOCL) and recorded as a component of net periodic benefit cost for the periods presented. These costs totaled $382 million ($300 million, net of tax) and $312 million ($202 million, net of tax) during the quarter ended March 25, 2018 and the quarter ended March 26, 2017, which were recorded on our consolidated statements of comprehensive income as an increase to other comprehensive income.
The funding of our qualified defined benefit pension plans is determined in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act of 2006 (PPA), and in a manner consistent with CAS and Internal Revenue Code rules. During the quarter ended March 25, 2018, we contributed $1.5 billion to our qualified defined benefit pension plans. There were no material contributions to our qualified defined benefit pension plans during the quarter ended March 26, 2017. We will make additional contributions of $3.5 billion to our qualified defined benefit pension plans during the remainder of 2018.
NOTE 8 – LEGAL PROCEEDINGS AND CONTINGENCIES
We are a party to or have property subject to litigation and other proceedings that arise in the ordinary course of our business, including matters arising under provisions relating to the protection of the environment and are subject to contingencies related to certain businesses we previously owned. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment
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Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress.
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a thorough process in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.
Legal Proceedings
As a result of our acquisition of Sikorsky Aircraft Corporation (Sikorsky), we assumed the defense of and any potential liability for two civil False Claims Act lawsuits pending in the U.S. District Court for the Eastern District of Wisconsin. In October 2014, the U.S. Government filed a complaint in intervention in the first suit, which was brought by qui tam relator Mary Patzer, a former Derco Aerospace (Derco) employee. In May 2017, the U.S. Government filed a complaint in intervention in the second suit, which was brought by qui tam relator Peter Cimma, a former Sikorsky Support Services, Inc. (SSSI) employee. In November 2017, the Court consolidated the cases into a single action for discovery and trial.
The U.S. Government alleges that Sikorsky and two of its wholly-owned subsidiaries, Derco and SSSI, violated the civil False Claims Act, the Anti-Kickback Act, and the Truth in Negotiations Act in connection with a contract the U.S. Navy awarded to SSSI in June 2006 to support the Navy’s T-34 and T-44 fixed-wing turboprop training aircraft. SSSI subcontracted with Derco, primarily to procure and manage spare parts for the training aircraft. The U.S. Government alleges that SSSI overbilled the Navy on the contract as the result of Derco’s use of prohibited cost-plus-percentage-of-cost pricing to add profit and overhead costs as a percentage of the price of the spare parts that Derco procured and then sold to SSSI. The U.S. Government alleges that Derco’s claims to SSSI, SSSI’s claims to the Navy, and SSSI’s yearly Certificates of Final Indirect Costs from 2006 through 2012 were false. In addition to violations of the False Claims Act, the U.S. Government alleges violations of the Anti-Kickback Act based on a monthly “chargeback,” through which SSSI billed Derco for the cost of certain SSSI personnel, allegedly in exchange for SSSI’s permitting a pricing arrangement that was “highly favorable” to Derco. The U.S. Government also claims that SSSI submitted inaccurate cost or pricing data in violation of the Truth in Negotiations Act for a sole-sourced, follow-on “bridge” contract. The U.S. Government’s complaints assert common law claims for breach of contract and unjust enrichment. On January 12, 2018, the Corporation filed a partial motion to dismiss intended to narrow the U.S. Government’s claims. The Corporation also moved to dismiss Cimma as a party under the False Claims Act’s first-to-file rule, which permits only the first relator to recover in a pending case. We await the District Court’s ruling on these motions.
The U.S. Government currently seeks damages in these lawsuits of approximately $52 million, subject to trebling, plus statutory penalties. We believe that we have legal and factual defenses to the U.S. Government’s claims. Although we continue to evaluate our liability and exposure, we do not currently believe that it is probable that we will incur a material loss. If, contrary to our expectations, the U.S. Government prevails in this matter and proves damages at or near $52 million and is successful in having such damages trebled, the outcome could have an adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
On April 24, 2009, we filed a declaratory judgment action against the New York Metropolitan Transportation Authority and its Capital Construction Company (collectively, the MTA) asking the U.S. District Court for the Southern District of New York to find that the MTA is in material breach of our agreement based on the MTA’s failure to provide access to sites where work must be performed and the customer-furnished equipment necessary to complete the contract. The MTA filed an answer and counterclaim alleging that we breached the contract and subsequently terminated the contract for alleged default. The primary damages sought by the MTA are the costs to complete the contract and potential re-procurement costs. While we are unable to estimate the cost of another contractor to complete the contract and the costs of re-procurement, we note that our contract with the MTA had a total value of $323 million, of which $241 million was paid to us, and that the MTA is seeking damages of approximately $190 million. We dispute the MTA’s allegations and are defending against them. Additionally, following an investigation, our sureties on a performance bond related to this matter, who were represented by independent counsel, concluded that the MTA’s termination of the contract was improper.
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Notes to Consolidated Financial Statements (unaudited) (continued)
Finally, our declaratory judgment action was later amended to include claims for monetary damages against the MTA of approximately $95 million. This matter was taken under submission by the District Court in December 2014, after a five-week bench trial and the filing of post-trial pleadings by the parties. We continue to await a decision from the District Court. Although this matter relates to our former Information Systems & Global Solutions (IS&GS) business, we retained the litigation when we divested IS&GS in 2016.
Environmental Matters
We are involved in proceedings and potential proceedings relating to soil, sediment, surface water, and groundwater contamination, disposal of hazardous waste, and other environmental matters at several of our current or former facilities and at third-party sites where we have been designated as a potentially responsible party (PRP). A substantial portion of environmental costs will be included in our net sales and cost of sales in future periods pursuant to U.S. Government regulations. At the time a liability is recorded for future environmental costs, we record a receivable for estimated future recovery considered probable through the pricing of products and services to agencies of the U.S. Government, regardless of the contract form (e.g., cost-reimbursable, fixed-price). We continually evaluate the recoverability of our environmental receivables by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and efforts by some U.S. Government representatives to limit such reimbursement. We include the portion of those environmental costs expected to be allocated to our non-U.S. Government contracts, or that is determined not to be recoverable under U.S. Government contracts, in our cost of sales at the time the liability is established.
At March 25, 2018 and December 31, 2017, the aggregate amount of liabilities recorded relative to environmental matters was $911 million and $920 million, most of which are recorded in other noncurrent liabilities on our consolidated balance sheets. We have recorded receivables totaling $791 million and $799 million at March 25, 2018 and December 31, 2017, most of which are recorded in other noncurrent assets on our consolidated balance sheets, for the estimated future recovery of these costs, as we consider the recovery probable based on the factors previously mentioned. We project costs and recovery of costs over approximately 20 years.
Environmental remediation activities usually span many years, which makes estimating liabilities a matter of judgment because of uncertainties with respect to assessing the extent of the contamination as well as such factors as changing remediation technologies and changing regulatory environmental standards. There are a number of former and present operating facilities that we are monitoring or investigating for potential future remediation. We perform quarterly reviews of the status of our environmental remediation sites and the related liabilities and receivables. Additionally, in our quarterly reviews, we consider these and other factors in estimating the timing and amount of any future costs that may be required for remediation activities, and record a liability when it is probable that a loss has occurred and the loss can be reasonably estimated. The amount of liability recorded is based on our estimate of the costs to be incurred for remediation at a particular site. We do not discount the recorded liabilities, as the amount and timing of future cash payments are not fixed or cannot be reliably determined. We reasonably cannot determine the extent of our financial exposure in all cases as, although a loss may be probable or reasonably possible, in some cases it is not possible at this time to estimate the loss or reasonably possible loss or range of loss.
We also pursue claims for recovery of costs incurred or for contribution to site cleanup costs against other PRPs, including the U.S. Government, and are conducting remediation activities under various consent decrees, orders, and agreements relating to soil, groundwater, sediment, or surface water contamination at certain sites of former or current operations. Under agreements related to certain sites in California and New York, the U.S. Government reimburses us an amount equal to a percentage, specific to each site, of expenditures for certain remediation activities in the U.S. Government’s capacity as a PRP under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
In addition to the proceedings and potential proceedings discussed above, California previously established a maximum level of the contaminant hexavalent chromium in drinking water of 10 parts per billion (ppb). Recently, this standard was successfully challenged by the California Manufacturers and Technology Association (CMTA) for failure to conduct the required economic feasibility analysis. In response to the court’s ruling, the State Water Resources Control Board (State Board), a branch of the California Environmental Protection Agency, withdrew the hexavalent chromium standard from the published regulations, leaving only the 50 ppb standard for total chromium. The State Board has indicated it will work to re-establish a hexavalent chromium standard. If the standard for hexavalent chromium is
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Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
re‑established at 10 ppb or above, it will not have a material impact on our existing remediation costs in California. Further, the U.S. Environmental Protection Agency (U.S. EPA) is considering whether to regulate hexavalent chromium.
California is also reevaluating its existing drinking water standard of 6 ppb for perchlorate, and the U.S. EPA is taking steps to regulate perchlorate in drinking water. If substantially lower standards are adopted, in either California or at the federal level for perchlorate or for hexavalent chromium, we expect a material increase in our estimates for environmental liabilities and the related assets for the portion of the increased costs that are probable of future recovery in the pricing of our products and services for the U.S. Government. The amount that would be allocable to our non-U.S. Government contracts or that is determined not to be recoverable under U.S. Government contracts would be expensed, which may have a material effect on our earnings in any particular interim reporting period.
Letters of Credit, Surety Bonds and Third-Party Guarantees
We have entered into standby letters of credit and surety bonds issued on our behalf by financial institutions, and directly issued guarantees to third parties primarily relating to advances received from customers and the guarantee of future performance on certain contracts. Letters of credit and surety bonds generally are available for draw down in the event we do not perform. In some cases, we may guarantee the contractual performance of third parties such as venture partners. We had total outstanding letters of credit, surety bonds and third-party guarantees aggregating $3.4 billion and $3.3 billion at March 25, 2018 and December 31, 2017, respectively. Third-party guarantees do not include guarantees of subsidiaries and other consolidated entities.
At March 25, 2018 and December 31, 2017, third-party guarantees totaled $778 million and $750 million, respectively, of which approximately 63% and 62% related to guarantees of contractual performance of ventures to which we currently are or previously were a party. This amount represents our estimate of the maximum amount we would expect to incur upon the contractual non-performance of the venture, venture partners or divested businesses. Generally, we also have cross-indemnities in place that may enable us to recover amounts that may be paid on behalf of a venture partner.
In determining our exposures, we evaluate the reputation, performance on contractual obligations, technical capabilities and credit quality of our current and former venture partners and the transferee under novation agreements all of which include a guarantee as required by the FAR. There were no material amounts recorded in our financial statements related to third-party guarantees or novation agreements.
United Launch Alliance
In connection with our 50% ownership interest of ULA, we and The Boeing Company (Boeing) are required to provide ULA an additional capital contribution if ULA is unable to make required payments under its inventory supply agreement with Boeing. As of March 25, 2018, ULA’s total remaining obligation to Boeing under the inventory supply agreement was $120 million. The parties have agreed to defer the remaining payment obligation, as it is more than offset by other commitments to ULA. Accordingly, we do not expect to be required to make a capital contribution to ULA under this agreement.
In addition, both we and Boeing have cross-indemnified each other for guarantees by us and Boeing of the performance and financial obligations of ULA under certain launch service contracts. We believe ULA will be able to fully perform its obligations, as it has done through March 25, 2018, and that it will not be necessary to make payments under the cross-indemnities or guarantees.
22
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
NOTE 9 – FAIR VALUE MEASUREMENTS
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following (in millions):
March 25, 2018 | December 31, 2017 | |||||||||||||||||||||||
Total | Level 1 | Level 2 | Total | Level 1 | Level 2 | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Mutual funds | $ | 1,005 | $ | 1,005 | $ | — | $ | 917 | $ | 917 | $ | — | ||||||||||||
U.S. Government securities | 98 | — | 98 | 116 | — | 116 | ||||||||||||||||||
Other securities | 161 | 35 | 126 | 209 | 39 | 170 | ||||||||||||||||||
Derivatives | 24 | — | 24 | 23 | — | 23 | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Derivatives | 91 | — | 91 | 106 | — | 106 | ||||||||||||||||||
Assets measured at NAV (a) | ||||||||||||||||||||||||
Other commingled funds | 18 | 19 | ||||||||||||||||||||||
(a) | Net Asset Value (NAV) is the total value of the fund divided by the number of the fund’s shares outstanding. |
Substantially all assets measured at fair value, other than derivatives, represent investments held in a separate trust to fund certain of our non-qualified deferred compensation plans and are recorded in other noncurrent assets on our consolidated balance sheets. The fair values of mutual funds and certain other securities are determined by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. The fair values of U.S. Government and other securities are determined using pricing models that use observable inputs (e.g., interest rates and yield curves observable at commonly quoted intervals), bids provided by brokers or dealers or quoted prices of securities with similar characteristics. The fair values of derivative instruments, which consist of foreign currency exchange forward and interest rate swap contracts, primarily are determined based on the present value of future cash flows using model-derived valuations that use observable inputs such as interest rates, credit spreads and foreign currency exchange rates. We did not have any transfers of assets or liabilities between levels of the fair value hierarchy during the quarter ended March 25, 2018.
We use derivative instruments principally to reduce our exposure to market risks from changes in foreign currency exchange rates and interest rates. We do not enter into or hold derivative instruments for speculative trading purposes. We transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into foreign currency hedges such as forward and option contracts that change in value as foreign currency exchange rates change. These contracts hedge forecasted foreign currency transactions in order to mitigate fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates. We designate foreign currency hedges as cash flow hedges. We also are exposed to the impact of interest rate changes primarily through our borrowing activities. For fixed rate borrowings, we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings in order to reduce the amount of interest paid. These swaps are designated as fair value hedges. For variable rate borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in order to mitigate the impact of interest rate changes on earnings. These swaps are designated as cash flow hedges. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are intended to mitigate certain economic exposures.
The aggregate notional amount of our outstanding interest rate swaps at both March 25, 2018 and December 31, 2017 was $1.2 billion and the fair value was not significant. The aggregate notional amount of our outstanding foreign currency hedges at both March 25, 2018 and December 31, 2017 was $4.1 billion and the fair value was not significant. Derivative instruments did not have a material impact on net earnings and comprehensive income during the quarters ended March 25, 2018 and March 26, 2017. Substantially all of our derivatives are designated for hedge accounting.
In addition to the financial instruments listed in the table above, we hold other financial instruments, including debt. The estimated fair value of our outstanding debt was $15.8 billion and $16.8 billion at March 25, 2018 and December 31, 2017 (Level 2). The outstanding principal amount was $15.4 billion and $15.5 billion, excluding unamortized discounts and issuance costs of $1.2 billion at both March 25, 2018 and December 31, 2017.
23
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
NOTE 10 – STOCKHOLDERS’ EQUITY
Repurchases of Common Stock
During the quarter ended March 25, 2018, we repurchased 0.9 million shares of our common stock for $300 million. The total remaining authorization for future common share repurchases under our share repurchase program was $3.2 billion as of March 25, 2018. As we repurchase our common shares, we reduce common stock for the $1 of par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in capital. If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings. Due to the volume of repurchases made under our share repurchase program, additional paid-in capital was reduced to zero, with the remainder of the excess purchase price over par value of $274 million and $469 million recorded as a reduction of retained earnings during the quarters ended March 25, 2018 and March 26, 2017.
Dividends
We declared cash dividends totaling $573 million ($2.00 per share) and $531 million ($1.82 per share) during the quarters ended March 25, 2018 and March 26, 2017. Dividends paid during the quarters ended March 25, 2018 and March 26, 2017 are higher than dividends declared due to dividend-equivalents paid to holders of RSUs. These dividend-equivalents are accrued during the RSU vesting period and are paid upon the vesting of the RSU.
Restricted Stock Unit Grants
During the quarter ended March 25, 2018, we granted certain employees approximately 0.4 million RSUs with a grant date fair value of $354.60 per RSU. The grant date fair value of these RSUs is equal to the closing market price of our common stock on the grant date less a discount to reflect the delay in payment of dividend-equivalent cash payments that are made only upon vesting, which is generally three years from the grant date. We recognize the grant date fair value of RSUs, less estimated forfeitures, as compensation expense ratably over the requisite service period, which is shorter than the vesting period if the employee is retirement eligible on the date of grant or will become retirement eligible before the end of the vesting period.
24
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Accumulated Other Comprehensive Loss
Changes in the balance of AOCL, net of tax, consisted of the following (in millions):
Postretirement Benefit Plans | Other, net | AOCL | ||||||||||
Balance at December 31, 2017 | $ | (12,559 | ) | $ | 20 | $ | (12,539 | ) | ||||
Other comprehensive income before reclassifications | — | 55 | 55 | |||||||||
Amounts reclassified from AOCL | ||||||||||||
Recognition of net actuarial losses (a) | 364 | — | 364 | |||||||||
Amortization of net prior service credits (a) | (64 | ) | — | (64 | ) | |||||||
Other | — | 3 | 3 | |||||||||
Total reclassified from AOCL | 300 | 3 | 303 | |||||||||
Total other comprehensive income | 300 | 58 | 358 | |||||||||
Reclassification of income tax effects from tax reform (b) | (2,396 | ) | (12 | ) | (2,408 | ) | ||||||
Balance at March 25, 2018 | $ | (14,655 | ) | $ | 66 | $ | (14,589 | ) | ||||
Balance at December 31, 2016 | $ | (11,981 | ) | $ | (121 | ) | $ | (12,102 | ) | |||
Other comprehensive income before reclassifications | 3 | 4 | 7 | |||||||||
Amounts reclassified from AOCL | ||||||||||||
Recognition of net actuarial losses (a) | 258 | — | 258 | |||||||||
Amortization of net prior service credits (a) | (56 | ) | — | (56 | ) | |||||||
Other | — | 1 | 1 | |||||||||
Total reclassified from AOCL | 202 | 1 | 203 | |||||||||
Total other comprehensive income | 205 | 5 | 210 | |||||||||
Balance at March 26, 2017 | $ | (11,776 | ) | $ | (116 | ) | $ | (11,892 | ) | |||
(a) | Reclassifications from AOCL related to our postretirement benefit plans were recorded as a component of net periodic benefit cost for each period presented (see “Note 7 – Postretirement Benefit Plans”). |
(b) | We reclassified the impact of the income tax effects related to the Tax Cuts and Jobs Act of 2017 (the Tax Act) from AOCL during the quarter ended March 25, 2018 to retained earnings by the same amount with zero impact to total equity. See ASU 2018-02 in “Note 12 – Recent Accounting Pronouncements” for additional information. |
NOTE 11 – OTHER
Equity Method Investee Impairment
During the quarter ended March 26, 2017, equity earnings included a charge recorded of approximately $64 million ($40 million, or $0.14 per share, after tax), which represented our portion of a non-cash asset impairment related to certain long-lived assets held by our equity method investee, AMMROC. We are continuing to monitor this investment. If AMMROC’s business experiences additional performance, business base and economic issues, we may have to record our portion of additional charges, which could adversely affect our business, financial condition and results of operations.
Income Taxes
Our effective income tax rates were 14.9% and 23.8% for the quarters ended March 25, 2018 and March 26, 2017. The rate for the quarter ended March 25, 2018 includes the provisional impact of the Tax Act enacted in December 2017. The rates for both periods benefited from tax deductions for dividends paid to our defined contribution plans with an employee stock ownership plan feature, tax deductions for employee equity awards, and the research and development tax credit. The rate for the first quarter of 2018 also benefited from the Tax Act’s deduction for foreign derived intangible income. The rate for the first quarter of 2017 benefited from tax deductions for U.S. manufacturing activities, which the Tax Act repealed for years after 2017.
While we have substantially completed our provisional analysis of the income tax effects of the Tax Act as of December 31, 2017 and recorded a reasonable estimate in 2017 of such effects, actual effects may differ, possibly
25
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
materially, due to, among other things, further refinement of our calculations, changes in interpretations and assumptions that we have made, additional guidance that may be issued by the U.S. Government, and actions and related accounting policy decisions we may take as a result of the Tax Act. We will complete our analysis of the impact of the Tax Act for 2017 over a one-year measurement period ending December 22, 2018, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. We have not identified any change to the net one-time charge for the period ending December 31, 2017 related to the Tax Act.
NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements Adopted
Effective January 1, 2018, we adopted ASC 606, which replaces existing revenue recognition guidance and outlines a single set of comprehensive principles for recognizing revenue under GAAP. Among other things, ASC 606 requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenues, which is referred to as a performance obligation. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services. Prior to the adoption of ASC 606, we recognized the majority of our revenues using the percentage-of-completion method of accounting. Based on the nature of products provided or services performed, revenue was recorded as costs were incurred (the percentage-of-completion cost-to-cost method) or as units were delivered (the percentage-of-completion units-of-delivery method). For most of our contracts, the customer obtains control or receives benefits as we perform on the contract. As a result, under ASC 606 revenue is recognized over a period of time utilizing the percentage-of-completion cost-to-cost method. This change generally results in an acceleration of revenue for contracts that were historically accounted for using the percentage-of-completion units-of-delivery method as revenues are now recognized earlier in the performance period as we incur costs. For more information on our policy for recognizing revenue under ASC 606, see “Note 2 – Significant Accounting Policy Updates.” Significant programs impacted by these changes include the C-130J and C-5 programs in our Aeronautics business segment; tactical missile programs (Hellfire and Joint Air-to-Surface Standoff Missile (JASSM)), Patriot Advanced Capability-3 (PAC-3), and fire control programs (LANTIRN® and SNIPER®) in our MFC business segment; the Black Hawk and Seahawk helicopter programs in our RMS business segment; and commercial satellite programs in our Space business segment.
We adopted ASC 606 using the full retrospective method, which means we applied the new standard to each prior year presented in our financial statements going back to January 1, 2016, with a cumulative effect adjustment to retained earnings as of January 1, 2016 for contracts that were in process at that point in time. Accordingly, the amounts for all periods presented in this Form 10-Q have been adjusted to reflect the impacts of ASC 606.
The net impact of adjustments on our January 1, 2016 opening balance sheet resulted in an increase in both our current assets and current liabilities of approximately 1%. There was no cumulative impact to our retained earnings at January 1, 2016. Our 2016 net sales increased by $42 million and our operating profit and net earnings from continuing operations decreased by $132 million and $92 million ($0.30 per share), respectively. The adoption of ASC 606 decreased our 2017 net sales by $1.1 billion and decreased our operating profit and net earnings from continuing operations by $23 million and $39 million ($0.14 per share), respectively. Total net cash provided by operating activities and total net cash used by investing activities and financing activities on our consolidated statements of cash flows were not impacted by the adoption of ASC 606. These amounts are updated from the preliminary assessment of the impacts of adopting ASC 606 included in our 2017 Form 10-K.
Effective January 1, 2018, we also adopted ASU 2017-07, which changed the income statement presentation of certain components of net periodic benefit cost related to defined benefit pension and other postretirement benefit plans. ASU 2017-07 requires entities to record only the service cost component of FAS pension and other postretirement benefit plan expense in operating profit and the non-service cost components of FAS pension and other postretirement benefit plan expense (i.e., interest cost, expected return on plan assets, net actuarial gains or losses, and amortization of prior service cost or credits) as part of non-operating income. Previously, we recorded all components of net periodic benefit cost in operating profit as part of cost of sales. We adopted ASU 2017-07 using the retrospective method, which means we applied the new standard to each prior period presented in our financial statements going back to January 1, 2016. The adoption of ASU 2017-07 increased our 2016 and 2017 consolidated operating profit by $471 million and $846 million due to the reclassification of the non-service cost components of FAS pension and other postretirement benefit plan
26
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
expense to other non-operating expense, net with zero impact to net income in both periods. There was no cumulative impact to our retained earnings at January 1, 2016 because the reclassification of the non-service cost components of FAS pension and other postretirement benefit plan expense has no impact to net income. Additionally, our business segment operating profit, cash flows, and pension and other postretirement benefit obligations were not impacted by the adoption of ASU 2017-07.
The following table summarizes the effects of adopting ASC 606 and ASU 2017-07 on our consolidated statement of earnings for the quarter ended March 26, 2017 (unaudited; in millions, except per share data):
Adjustments for | ||||||||||||||||||||
Historical | ASC 606 | ASU 2017-07 | Adjusted | |||||||||||||||||
Net sales | ||||||||||||||||||||
Products | $ | 9,513 | $ | 100 | $ | — | $ | 9,613 | ||||||||||||
Services | 1,544 | 55 | — | 1,599 | ||||||||||||||||
Total net sales | 11,057 | 155 | — | 11,212 | ||||||||||||||||
Cost of sales | ||||||||||||||||||||
Products | (8,687 | ) | (57 | ) | — | (8,744 | ) | |||||||||||||
Services | (1,376 | ) | (58 | ) | — | (1,434 | ) | |||||||||||||
Other unallocated, net | 159 | — | 213 | 372 | ||||||||||||||||
Total cost of sales | (9,904 | ) | (115 | ) | 213 | (9,806 | ) | |||||||||||||
Gross profit | 1,153 | 40 | 213 | 1,406 | ||||||||||||||||
Other expense, net | (4 | ) | — | — | (4 | ) | ||||||||||||||
Operating profit | 1,149 | 40 | 213 | 1,402 | ||||||||||||||||
Interest expense | (155 | ) | — | — | (155 | ) | ||||||||||||||
Other non-operating income (expense), net | 1 | — | (213 | ) | (212 | ) | ||||||||||||||
Earnings before income taxes | 995 | 40 | — | 1,035 | ||||||||||||||||
Income tax expense | (232 | ) | (14 | ) | — | (246 | ) | |||||||||||||
Net earnings | $ | 763 | $ | 26 | $ | — | $ | 789 | ||||||||||||
Earnings per common share | ||||||||||||||||||||
Basic | $ | 2.63 | $ | 0.09 | $ | — | $ | 2.72 | ||||||||||||
Diluted | $ | 2.61 | $ | 0.08 | $ | — | $ | 2.69 | ||||||||||||
Cash dividends paid per common share | $ | 1.82 | $ | — | $ | — | $ | 1.82 | ||||||||||||
As a result of the increase in net earnings, our comprehensive income for the quarter ended March 26, 2017 increased by $26 million to $999 million.
27
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
The following table summarizes the effects of adopting ASC 606 on our consolidated balance sheet as of December 31, 2017 (ASU 2017-07 had no impact on our consolidated balance sheet) (unaudited; in millions, except par value):
Adjustments for | |||||||||||||||
Historical | ASC 606 | Adjusted | |||||||||||||
Assets | |||||||||||||||
Current assets | |||||||||||||||
Cash and cash equivalents | $ | 2,861 | $ | — | $ | 2,861 | |||||||||
Receivables, net | 8,603 | (6,338 | ) | 2,265 | |||||||||||
Contract assets | — | 7,992 | 7,992 | ||||||||||||
Inventories | 4,487 | (1,609 | ) | 2,878 | |||||||||||
Other current assets | 1,510 | (1 | ) | 1,509 | |||||||||||
Total current assets | 17,461 | 44 | 17,505 | ||||||||||||
Property, plant and equipment, net | 5,775 | — | 5,775 | ||||||||||||
Goodwill | 10,807 | — | 10,807 | ||||||||||||
Intangible assets, net | 3,797 | — | 3,797 | ||||||||||||
Deferred income taxes | 3,111 | 45 | 3,156 | ||||||||||||
Other noncurrent assets | 5,570 | 10 | 5,580 | ||||||||||||
Total assets | $ | 46,521 | $ | 99 | $ | 46,620 | |||||||||
Liabilities and equity | |||||||||||||||
Current liabilities | |||||||||||||||
Accounts payable | $ | 1,467 | $ | — | $ | 1,467 | |||||||||
Contract liabilities (a) | 6,752 | 276 | 7,028 | ||||||||||||
Salaries, benefits and payroll taxes | 1,785 | — | 1,785 | ||||||||||||
Current maturities of long-term debt | 750 | — | 750 | ||||||||||||
Other current liabilities | 1,883 | — | 1,883 | ||||||||||||
Total current liabilities | 12,637 | 276 | 12,913 | ||||||||||||
Long-term debt, net | 13,513 | — | 13,513 | ||||||||||||
Accrued pension liabilities | 15,703 | — | 15,703 | ||||||||||||
Other postretirement benefit liabilities | 719 | — | 719 | ||||||||||||
Other noncurrent liabilities | 4,558 | (10 | ) | 4,548 | |||||||||||
Total liabilities | 47,130 | 266 | 47,396 | ||||||||||||
Stockholders’ equity | |||||||||||||||
Common stock, $1 par value per share | 284 | — | 284 | ||||||||||||
Additional paid-in capital | — | — | — | ||||||||||||
Retained earnings | 11,573 | (168 | ) | 11,405 | |||||||||||
Accumulated other comprehensive loss | (12,540 | ) | 1 | (12,539 | ) | ||||||||||
Total stockholders’ deficit | (683 | ) | (167 | ) | (850 | ) | |||||||||
Noncontrolling interests in subsidiary | 74 | — | 74 | ||||||||||||
Total deficit | (609 | ) | (167 | ) | (776 | ) | |||||||||
Total liabilities and equity | $ | 46,521 | $ | 99 | $ | 46,620 | |||||||||
(a) | Formerly referred to as customer advances and amounts in excess of costs incurred. |
28
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
The following table summarizes the effects of adopting ASC 606 on certain components within our net cash provided by operating activities for the quarter ended March 26, 2017 (ASC 606 had no impact on total operating cash flows or cash flows from investing and financing activities) (unaudited; in millions):
Adjustments for | |||||||||||||||
Historical | ASC 606 | Adjusted | |||||||||||||
Operating activities | |||||||||||||||
Net earnings | $ | 763 | $ | 26 | $ | 789 | |||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities | |||||||||||||||
Depreciation and amortization | 285 | — | 285 | ||||||||||||
Stock-based compensation | 44 | — | 44 | ||||||||||||
Changes in assets and liabilities | |||||||||||||||
Receivables, net | (667 | ) | (132 | ) | (799 | ) | |||||||||
Contract assets | — | (62 | ) | (62 | ) | ||||||||||
Inventories | (404 | ) | 179 | (225 | ) | ||||||||||
Accounts payable | 1,111 | — | 1,111 | ||||||||||||
Contract liabilities (a) | (204 | ) | 19 | (185 | ) | ||||||||||
Postretirement benefit plans | 345 | — | 345 | ||||||||||||
Income taxes | 175 | — | 175 | ||||||||||||
Other, net | 218 | (30 | ) | 188 | |||||||||||
Net cash provided by operating activities | $ | 1,666 | $ | — | $ | 1,666 | |||||||||
(a) | Formerly referred to as customer advances and amounts in excess of costs incurred. |
Effective January 1, 2018, we also adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides entities an option to reclassify certain tax effects as a result of the Tax Act from accumulated other comprehensive income or loss to retained earnings. The adoption of ASU 2018-02 increased our AOCL at January 1, 2018 by $2.4 billion with a corresponding increase to retained earnings by the same amount with zero impact to total equity. The reclassification was primarily related to the impact of U.S. tax reform on deferred tax assets associated with net actuarial losses (and prior service credits) resulting from our defined benefit pension and other postretirement benefit plans that were originally recorded in AOCL within equity. Those amounts were originally recorded net of deferred tax benefits based on the federal statutory income tax rate in effect at the time they were recorded. GAAP requires entities to remeasure deferred tax assets and liabilities as a result of a change in tax laws or rates, with the impacts reflected in earnings. Accordingly, in the fourth quarter of 2017, we remeasured the deferred tax assets associated with our AOCL using the lower U.S. corporate income tax rate under the Tax Act, with the impacts of the remeasurement recorded as a one-time charge to earnings. Prior to ASU 2018-02, GAAP required the original deferred tax amount recorded in accumulated other comprehensive income or loss, to remain at the old tax rate despite the fact that its related deferred tax asset or liability was remeasured as a result of the Tax Act. ASU 2018-02 allows entities to record a one-time reclassification of these tax effects between accumulated other comprehensive income or loss and retained earnings. We reclassify the impact of the income tax effects of tax reform from AOCL in the period in which they occur.
29
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Recent Accounting Pronouncements Not Yet Adopted
In August 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-12, Derivatives and Hedging (Topic 815), which eliminates the requirement to separately measure and report hedge ineffectiveness. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We do not expect a significant impact to our consolidated assets and liabilities, net earnings, or cash flows as a result of adopting this new standard. We plan to adopt the new standard effective January 1, 2019.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements for both lessees and lessors. The new standard is effective January 1, 2019 for public companies, with early adoption permitted. Currently, ASU 2016-02 requires companies to adopt the requirements of the new standard by applying a modified retrospective approach to the beginning of the earliest period presented in the financial statements. However, the FASB issued an exposure draft in January 2018, which would allow companies the option to instead apply the provisions of the new standard at the effective date without adjusting the comparative periods presented. We are continuing to evaluate the expected impact to our consolidated financial statements and related disclosures. We plan to adopt the new standard effective January 1, 2019.
30
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Lockheed Martin Corporation
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheet of Lockheed Martin Corporation (the Corporation) as of March 25, 2018, the related consolidated statements of earnings, comprehensive income, cash flows and equity for the quarters ended March 25, 2018 and March 26, 2017, and the related notes (collectively referred to as the “consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Corporation as of December 31, 2017, the related consolidated statements of earnings, comprehensive income, cash flows and equity for the year then ended, and the related notes (not presented herein); and in our report dated February 6, 2018, we expressed an unqualified audit opinion on those consolidated financial statements. As described in Note 1 to the Corporation’s consolidated interim financial statements, on January 1, 2018, the Corporation adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, using the full retrospective adoption method resulting in revision of the December 31, 2017 consolidated balance sheet. We have not audited and reported on the revised December 31, 2017 consolidated balance sheet reflecting the adoption of ASU No. 2014-09.
Basis for Review Results
These financial statements are the responsibility of the Corporation’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Ernst & Young LLP
Tysons, Virginia
April 25, 2018
31
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEW
We are a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We also provide a broad range of management, engineering, technical, scientific, logistics, system integration and cybersecurity services. We serve both U.S. and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S. Government. During the quarter ended March 25, 2018, 69% of our $11.6 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 58% from the Department of Defense (DoD)), 29% were from international customers (including foreign military sales (FMS) contracted through the U.S. Government) and 2% were from U.S. commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security and information technology, including cybersecurity.
We currently expect 2018 net sales will increase in the low-single digit range from 2017 levels. The projected growth is driven by increased production and sustainment volume on the F-35 program at Aeronautics as well as increased volume in tactical missiles programs at Missiles and Fire Control (MFC), partially offset by decreased volume at Rotary and Mission Systems (RMS) and Space. Segment operating profit is expected to increase in the mid-single digit range from 2017 levels driven primarily by improved performance at RMS. We expect that 2018 segment operating profit margin will also exceed our 2017 margin of 10.2%. Our outlook for 2018 assumes the U.S. Government continues to support and fund our key programs, consistent with the government fiscal year 2018 budget. Changes in circumstances may require us to revise our assumptions, which could materially change our current estimate of 2018 net sales and operating profit margin. For additional information related to trends in net sales and operating profit at our business segments, see the “Business Segment Results of Operations” discussion below.
We continue to expect the net 2018 FAS/CAS pension benefit to be approximately $1.0 billion. We will make contributions of $5.0 billion to our qualified defined benefit pension plans in 2018, including required and discretionary contributions. As a result of these contributions, we do not expect any material qualified defined benefit cash funding will be required until 2021. We plan to fund these contributions using a mix of cash on hand and commercial paper. While we do not anticipate a need to do so, our capital structure and resources would allow us to issue new debt if circumstances change (see “Capital Structure, Resources and Other” discussion below).
The following discussion is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and notes thereto and with our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K).
INDUSTRY CONSIDERATIONS
U.S. Government Funding
During the first quarter of 2018, there were a number of budgetary actions taken by the U.S. Government that affect defense spending. On February 9, 2018, the President signed the Bipartisan Budget Act of 2018 (BBA of 2018), which increased the spending limits for both defense and non-defense discretionary funding for government fiscal years (FY) 2018 and 2019 (the U.S. Government’s fiscal year begins on October 1 and ends on September 30) established under the Budget Control Act of 2011 (the Budget Control Act), among other items. The defense spending limits were increased by $80 billion to $629 billion for FY 2018 and by $85 billion to $647 billion for FY 2019. The FY 2018 spending limit is consistent with the funding level authorized by Congress in the FY 2018 National Defense Authorization Act (NDAA) and exceeded the President’s FY 2018 budget request by $26 billion. The BBA of 2018 also suspended the debt ceiling through March 1, 2019, at which time the debt limit will be increased to the amount of U.S. Government debt outstanding on that date.
On February 12, 2018, the President submitted a budget proposal for FY 2019 to Congress, which includes a base budget for national defense of $647 billion, inclusive of $617 billion for the U.S. DoD. The base budget request for national defense is consistent with the revised spending limits established under the BBA of 2018 and represents an increase of nearly $18 billion over the FY 2018 funding level, most of which relates to increases in the DoD’s budget. Congress must approve or revise the President’s FY 2019 budget proposal through enactment of appropriations bills and other policy legislation, which would then require final approval from the President.
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On March 23, 2018, the Consolidated Appropriations Act of 2018 (the Appropriations Act of 2018) was signed into law, providing discretionary funding for the U.S. Government for FY 2018. The Appropriations Act of 2018 provides a base budget of $629 billion for national defense, inclusive of $600 billion for the DoD. The base budget request for national defense is consistent with the revised spending limits established under the BBA of 2018 and represents an increase of nearly $78 billion over the FY 2017 funding level, most of which relates to increases in the DoD’s budget.
Currently, U.S. defense spending in FY 2020 and FY 2021 remains subject to statutory spending limits established by the Budget Control Act. The Budget Control Act spending limits were modified for fiscal years 2013 through 2019 by the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, the Bipartisan Budget Act of 2015, and most recently the BBA of 2018. However, these acts do not alter the spending limits beyond FY 2019. As currently enacted, the Budget Control Act limits defense spending to $576 billion (including approximately $550 billion for DoD) for fiscal year 2020 with a modest increase to $590 billion (including approximately $563 billion for DoD) in 2021. The President’s defense budget estimates for FY 2020 and beyond exceed the spending limits established by the Budget Control Act. As a result, continued budget uncertainty and the risk of future sequestration cuts remain unless the BCA is repealed or significantly modified.
The investments and acquisitions we have made in recent years have sought to align our businesses with what we believe are the most critical national priorities and mission areas. However, the possibility remains that our programs could be materially reduced, extended, or terminated as a result of the U.S. Government’s continuing assessment of priorities, changes in government priorities, the implementation of sequestration (particularly in those circumstances where sequestration is implemented across-the-board without regard to national priorities), or other budget cuts in lieu of sequestration. We anticipate there will continue to be a significant amount of debate and negotiations within the U.S. Government over federal and defense spending. In the context of these negotiations, it is possible that government programs could be modified, cut or replaced as part of broader reforms to reduce the federal deficit. However, we continue to believe that our portfolio of products and services will continue to be well supported in a strategically focused allocation of budget resources.
CONSOLIDATED RESULTS OF OPERATIONS
Effective January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (Topic 606) (commonly referred to as ASC 606), which changed the way we recognize revenue for certain contracts. In addition, effective January 1, 2018, we adopted ASU 2017-07, Compensation-Retirement Benefits, which changed the statement of earnings presentation of certain components of FAS pension and other postretirement benefit plan expense. The amounts for all periods presented in this Form 10-Q have been adjusted to reflect the new methods of accounting. See “Note 12 – Recent Accounting Pronouncements” included in our Notes to Consolidated Financial Statements for more information regarding the adoption of these standards.
Since our operating cycle is primarily long-term and involves many types of contracts for the design, development and manufacture of products and related activities with varying delivery schedules, the results of operations of a particular period, or period-to-period comparisons of sales and profits, may not be indicative of future operating results. The following discussions of comparative results among periods should be reviewed in this context. All per share amounts cited in these discussions are presented on a “per diluted share” basis, unless otherwise noted.
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Our consolidated results of operations were as follows (in millions, except per share data):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Net sales | $ | 11,635 | $ | 11,212 | ||||||
Cost of sales | (9,977 | ) | (9,806 | ) | ||||||
Gross profit | 1,658 | 1,406 | ||||||||
Other income (expense), net | 67 | (4 | ) | |||||||
Operating profit | 1,725 | 1,402 | ||||||||
Interest expense | (155 | ) | (155 | ) | ||||||
Other non-operating expense, net | (210 | ) | (212 | ) | ||||||
Earnings before income taxes | 1,360 | 1,035 | ||||||||
Income tax expense | (203 | ) | (246 | ) | ||||||
Net earnings | $ | 1,157 | $ | 789 | ||||||
Diluted earnings per common share | $ | 4.02 | $ | 2.69 | ||||||
Certain amounts reported in other income (expense), net, primarily our share of earnings or losses from equity method investees, are included in the operating profit of our business segments. Accordingly, such amounts are included in the discussion of our business segment results of operations.
Net Sales
We generate sales from the delivery of products and services to our customers. Our consolidated net sales were as follows (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Products | $ | 9,762 | $ | 9,613 | ||||||
% of total net sales | 83.9 | % | 85.7 | % | ||||||
Services | 1,873 | 1,599 | ||||||||
% of total net sales | 16.1 | % | 14.3 | % | ||||||
Total net sales | $ | 11,635 | $ | 11,212 | ||||||
Substantially all of our contracts are accounted for using the percentage-of-completion cost-to-cost method. Under the percentage-of-completion cost-to-cost method, we record net sales on contracts based upon our progress towards completion on a particular contract, as well as our estimate of the profit to be earned at completion. The following discussion of material changes in our consolidated net sales should be read in tandem with the subsequent discussion of changes in our consolidated cost of sales and our business segment results of operations because changes in our sales are typically accompanied by a corresponding change in our cost of sales due to the nature of the percentage-of-completion cost-to-cost method.
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Product Sales
Product sales increased $149 million, or 2%, during the quarter ended March 25, 2018 compared to the same period in 2017. The increase in product sales was primarily due to higher product sales of about $135 million at Aeronautics, about $95 million at MFC and about $70 million at RMS, partially offset by lower product sales of about $150 million at Space. Higher product sales at Aeronautics were primarily attributable to higher sales for F-35 production volume and higher volume on modernization activities for the F-16 program. The increase in product sales at MFC was primarily due to higher volume on classified programs. Higher product sales at RMS were attributable to higher volume across most lines of business, partially offset by lower volume on Sikorsky government helicopter programs. These increases were partially offset by lower product sales at Space primarily due to decreased volume for government satellite programs (primarily Space Based Infrared System (SBIRS) and Advanced Extremely High Frequency system (AEHF)) and decreased volume for commercial satellite programs, partially offset by higher AWE Management Limited (AWE) product sales due to higher volume.
Service Sales
Service sales increased $274 million, or 17%, during the quarter ended March 25, 2018 compared to the same period in 2017. The increase in service sales during the quarter ended March 25, 2018 was primarily due to higher service sales of about $140 million at Aeronautics and about $75 million at Space. The increase in service sales at Aeronautics was primarily due to higher volume on F-35 sustainment activities. Higher service sales at Space were primarily due to increased volume on government satellite services.
Cost of Sales
Cost of sales, for both products and services, consist of materials, labor, subcontracting costs, an allocation of indirect costs (overhead and general and administrative), as well as the costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers. For each of our contracts, we monitor the nature and amount of costs at the contract level, which form the basis for estimating our total costs to complete the contract. Our consolidated cost of sales were as follows (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Cost of sales – products | $ | (8,697 | ) | $ | (8,744 | ) | ||||
% of product sales | 89.1 | % | 91.0 | % | ||||||
Cost of sales – services | (1,689 | ) | (1,434 | ) | ||||||
% of service sales | 90.2 | % | 89.7 | % | ||||||
Other unallocated, net | 409 | 372 | ||||||||
Total cost of sales | $ | (9,977 | ) | $ | (9,806 | ) | ||||
The following discussion of material changes in our consolidated cost of sales for products and services should be read in tandem with the preceding discussion of changes in our consolidated net sales and our business segment results of operations. We have not identified any developing trends in cost of sales for products and services that would have a material impact on our future operations.
Product Costs
Product costs decreased $47 million, or 1%, during the quarter ended March 25, 2018 compared to the same period in 2017, primarily due to lower product costs of about $135 million at RMS and about $115 million at Space, partially offset by higher product costs of about $130 million at Aeronautics and about $70 million at MFC. The decrease in product costs at RMS is primarily attributable to a $120 million charge recorded in the first quarter of 2017 for performance matters on the EADGE-T contract. Lower product costs at Space were primarily due to decreased volume for government satellite programs (primarily SBIRS and AEHF) and decreased volume for commercial satellite programs. These decreases were partially offset by higher AWE product costs due to an increase in volume. Higher product costs at Aeronautics were primarily attributable to higher costs for F-35 production volume and higher volume on modernization activities for the F-16 program. The increase in product costs at MFC is primarily due to increased volume on classified programs.
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Service Costs
Service costs increased $255 million, or 18%, during the quarter ended March 25, 2018 compared to the same period in 2017. The increase in service costs during the quarter ended March 25, 2018 was primarily due to higher service costs of about $120 million at Aeronautics and about $60 million at Space. Higher service costs at Aeronautics were primarily due to higher volume on F-35 sustainment activities. Higher service costs at Space were primarily due to increased volume on government satellite services.
Other Unallocated, Net
Other unallocated, net primarily includes the FAS/CAS operating adjustment, which represents the difference between CAS pension cost recorded in our business segments’ results of operations and FAS pension service cost, stock-based compensation and other corporate costs. These items are not allocated to the business segments and, therefore, are excluded from the cost of sales for products and services. Other unallocated, net was a net reduction to expense of $409 million during the quarter ended March 25, 2018 compared to $372 million during the quarter ended March 26, 2017. The increase in the net reduction to expense during the quarter ended March 25, 2018 was primarily due to the change in the FAS/CAS operating adjustment and various corporate items, none of which were individually significant.
Other Income (Expense), Net
Other income (expense), net primarily includes our share of earnings or losses from equity method investees. During the quarter ended March 25, 2018, other income, net was $67 million, compared to $4 million of other expense, net for the quarter ended March 26, 2017. The increase in income was primarily attributable to our portion of a non-cash asset impairment charge recorded during the quarter ended March 26, 2017 by our equity method investee, Advanced Military Maintenance, Repair and Overhaul Center LLC (AMMROC), of approximately $64 million ($40 million, or $0.14 per share, after tax).
Other Non-operating Expense, Net
Other non-operating expense, net primarily includes the non-service cost components of FAS pension and other postretirement benefit plan expense (i.e., interest cost, expected return on plan assets, net actuarial gains or losses, and amortization of prior service cost or credits) related to our postretirement benefit plans. Other non-operating expense, net during the quarter ended March 25, 2018 was comparable to the same period in 2017.
Income Tax Expense
Our effective income tax rates were 14.9% and 23.8% for the quarters ended March 25, 2018 and March 26, 2017. The rate for the quarter ended March 25, 2018 includes the provisional impact of the Tax Cuts and Jobs Act (the Tax Act) enacted in December 2017. The rates for both periods benefited from tax deductions for dividends paid to our defined contribution plans with an employee stock ownership plan feature, tax deductions for employee equity awards, and the research and development tax credit. The rate for the first quarter of 2018 also benefited from the Tax Act’s deduction for foreign derived intangible income. The rate for the first quarter of 2017 benefited from tax deductions for U.S. manufacturing activities, which the Tax Act repealed for years after 2017.
While we have substantially completed our provisional analysis of the income tax effects of the Tax Act as of December 31, 2017 and recorded a reasonable estimate in 2017 of such effects, actual effects may differ, possibly materially, due to, among other things, further refinement of our calculations, changes in interpretations and assumptions that we have made, additional guidance that may be issued by the U.S. Government, and actions and related accounting policy decisions we may take as a result of the Tax Act. We will complete our analysis of the impact of the Tax Act for 2017 over a one-year measurement period ending December 22, 2018, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. We have not identified any change to the net one-time charge for the period ending December 31, 2017 related to the Tax Act.
Future changes in tax laws could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and stockholders’ equity. The amount of net deferred tax assets will change periodically based on several factors, including the measurement of our postretirement benefit plan obligations, actual cash contributions to our postretirement benefit plans, and future changes in tax laws.
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Net Earnings
We reported net earnings of $1.2 billion ($4.02 per share) during the quarter ended March 25, 2018, compared to $789 million ($2.69 per share) during the quarter ended March 26, 2017. Both net earnings and earnings per share were affected by the factors mentioned above. Earnings per share also benefited from a net decrease of approximately 3.9 million shares outstanding from March 26, 2017 to March 25, 2018 as a result of share repurchases, partially offset by share issuance under our stock-based awards and certain defined contribution plans.
BUSINESS SEGMENT RESULTS OF OPERATIONS
Effective January 1, 2018, we adopted ASC 606, which changed the way we recognize revenue for certain contracts. We adopted this standard using the full retrospective method. Accordingly, the amounts for all periods presented in this Form 10-Q have been adjusted to reflect the new method of accounting. See “Note 12 – Recent Accounting Pronouncements” included in our Notes to Consolidated Financial Statements for more information regarding the adoption of this standard.
We operate in four business segments: Aeronautics, MFC, RMS and Space. We organize our business segments based on the nature of the products and services offered.
Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation. Operating profit of our business segments includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments. In addition, operating profit of our business segments includes total pension costs recoverable on U.S. Government contracts as determined in accordance with U.S. Government cost accounting standards (CAS). Operating profit of the business segments excludes the FAS/CAS operating adjustment; expense for stock-based compensation; the effects of items not considered part of management’s evaluation of segment operating performance, such as charges related to significant severance actions and certain asset impairments; gains or losses from significant divestitures; the effects of certain legal settlements; corporate costs not allocated to our business segments; and other miscellaneous corporate activities. These items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 2 – Significant Accounting Policy Updates” included in our Notes to Consolidated Financial Statements for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.
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Summary operating results for each of our business segments were as follows (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Net sales | ||||||||||
Aeronautics | $ | 4,398 | $ | 4,120 | ||||||
Missiles and Fire Control | 1,677 | 1,549 | ||||||||
Rotary and Mission Systems | 3,223 | 3,127 | ||||||||
Space | 2,337 | 2,416 | ||||||||
Total net sales | $ | 11,635 | $ | 11,212 | ||||||
Operating profit | ||||||||||
Aeronautics | $ | 474 | $ | 439 | ||||||
Missiles and Fire Control | 261 | 234 | ||||||||
Rotary and Mission Systems (a) | 311 | 128 | ||||||||
Space | 264 | 290 | ||||||||
Total business segment operating profit | 1,310 | 1,091 | ||||||||
Unallocated items | ||||||||||
FAS/CAS operating adjustment (b) | 451 | 403 | ||||||||
Stock-based compensation | (38 | ) | (44 | ) | ||||||
Other, net (c) | 2 | (48 | ) | |||||||
Total unallocated items | 415 | 311 | ||||||||
Total consolidated operating profit | $ | 1,725 | $ | 1,402 | ||||||
(a) | During the first quarter of 2017, we revised the total estimated costs to complete the EADGE-T contract as a consequence of ongoing performance matters and recorded an additional reserve of $120 million ($74 million, or $0.25 per share, after tax) at our RMS business segment. |
(b) | The FAS/CAS operating adjustment represents the difference between the service cost component of U.S. GAAP financial accounting standards pension expense and total pension costs recoverable on U.S. Government contracts as determined in accordance with U.S. Government CAS. For a detail of the FAS/CAS operating adjustment and the total net FAS/CAS adjustment, see the table below. |
(c) | During the first quarter of 2017, we recognized a $64 million charge ($40 million, or $0.14 per share, after tax), which represents our portion of a non-cash asset impairment charge recorded by our equity method investee, AMMROC. See “Note 11 – Other” (under the caption “Equity Method Investee Impairment”) included in our Notes to Consolidated Financial Statements for more information. |
Our total FAS/CAS pension adjustment for the quarters ended March 25, 2018 and March 26, 2017, including the service and non-service cost components of FAS pension expense (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Total FAS expense and CAS costs | ||||||||||
FAS pension expense | $ | (356 | ) | $ | (345 | ) | ||||
Less: CAS pension cost | 608 | 562 | ||||||||
Net FAS/CAS pension adjustment | $ | 252 | $ | 217 | ||||||
Service and non-service cost reconciliation | ||||||||||
FAS pension service cost | $ | (157 | ) | $ | (159 | ) | ||||
Less: CAS pension cost | 608 | 562 | ||||||||
FAS/CAS operating adjustment | 451 | 403 | ||||||||
Non-operating FAS pension expense | (199 | ) | (186 | ) | ||||||
Net FAS/CAS pension adjustment | $ | 252 | $ | 217 | ||||||
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We recover CAS pension cost through the pricing of our products and services on U.S. Government contracts and, therefore, recognize CAS pension cost in each of our business segments’ net sales and cost of sales. Our consolidated financial statements must present FAS pension and other postretirement benefit plan expense calculated in accordance with financial accounting standards (FAS) requirements under U.S. GAAP. The operating portion of the FAS/CAS adjustment represents the difference between the service cost component of FAS pension expense and CAS. The non-service FAS pension cost component is included in other non-operating expense, net. The net FAS/CAS pension adjustment increases or decreases CAS pension cost to equal total FAS pension cost (both service and non-service).
Management evaluates performance on our contracts by focusing on net sales and operating profit and not by type or amount of operating expense. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing the business. This approach is consistent throughout the life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance on our contracts in a similar manner through their completion.
We regularly provide customers with reports of our costs as the contract progresses. The cost information in the reports is accumulated in a manner specified by the requirements of each contract. For example, cost data provided to a customer for a product would typically align to the subcomponents of that product (such as a wing-box on an aircraft) and for services would align to the type of work being performed (such as aircraft sustainment). Our contracts generally allow for the recovery of costs in the pricing of our products and services. Most of our contracts are bid and negotiated with our customers under circumstances in which we are required to disclose our estimated total costs to provide the product or service. This approach for negotiating contracts with our U.S. Government customers generally allows for recovery of our actual costs plus a reasonable profit margin. We also may enter into long-term supply contracts for certain materials or components to coincide with the production schedule of certain products and to ensure their availability at known unit prices.
Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract and assess the effects of those risks on our estimates of total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate.
Changes in net sales and operating profit generally are expressed in terms of volume. Changes in volume refer to increases or decreases in sales or operating profit resulting from varying production activity levels, deliveries or service levels on individual contracts. Volume changes in segment operating profit are typically based on the current profit booking rate for a particular contract.
Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts for which we recognize revenue over a period of time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate, resulting in an increase in the estimated total costs to fulfill the performance obligations and a reduction in the profit booking rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other items, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions, which are excluded from segment operating results; reserves for disputes; certain asset impairments; and losses on sales of certain assets.
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We have a program, EADGE-T, to design, integrate, and install an air missile defense command, control, communications, computers – intelligence (C4I) systems for an international customer that has experienced performance matters and for which we have periodically accrued reserves. During the quarter ended March 26, 2017, we revised our estimated costs to complete the EADGE-T contract as a consequence of ongoing performance matters and recorded an additional charge of $120 million ($74 million or $0.25 per share, after tax) at our RMS business segment. As of March 25, 2018, cumulative losses remained at approximately $260 million on this program. We are continuing to monitor program requirements and our performance and could record additional charges in future periods. However, based on the reserves already accrued and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional charges, if any, would be material.
We have two commercial satellite programs at our Space business segment, for which we have experienced performance issues related to the development and integration of a modernized LM 2100 satellite platform. These commercial programs require the development of new satellite technology to enhance the LM 2100’s power, propulsion and electronics, among other items. The enhanced satellite is expected to benefit other commercial and government satellite programs. We have periodically revised our estimated costs to complete these developmental commercial programs. We have recorded cumulative losses of approximately $340 million through March 25, 2018. During the quarter ended March 25, 2018, we recorded losses of approximately $35 million ($26 million or $0.09 per share, after tax). While these losses reflect our estimated total losses on the programs, we will continue to incur unrecovered costs each period until we complete these programs and may have to record additional loss reserves in future periods, which could be material to our operating results. These programs remain developmental and further challenges in the delivery and integration of new satellite technology, anomalies discovered during system testing requiring repair or rework, further schedule delays and potential penalties could require that we record additional reserves. Currently, we do not expect to be able to meet the delivery schedule under the contracts and have informed the customers. The customers could seek to exercise a termination right under the contracts, in which case we would have to refund the payments we have received and pay certain penalties. However, we think the probability that the customers will seek to exercise any termination right is remote as the delay beyond the termination date is modest and the customers have an immediate need for the satellites.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, increased segment operating profit by approximately $420 million and $295 million during the quarters ended March 25, 2018 and March 26, 2017.
Aeronautics
Summary operating results for our Aeronautics business segment were as follows (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Net sales | $ | 4,398 | $ | 4,120 | ||||||
Operating profit | 474 | 439 | ||||||||
Operating margin | 10.8 | % | 10.7 | % | ||||||
Aeronautics’ net sales during the quarter ended March 25, 2018 increased $278 million, or 7%, compared to the same period in 2017. The increase was primarily attributable to higher net sales of approximately $185 million for the F-35 program due to increased volume on production and sustainment; and about $80 million for other combat aircraft modernization programs due to increased volume (primarily the F-16 and F-22 programs).
Aeronautics’ operating profit during the quarter ended March 25, 2018 increased $35 million, or 8%, compared to the same period in 2017. Operating profit increased approximately $25 million for the F-35 program primarily due to increased volume on production and sustainment; and about $15 million for other combat aircraft modernization programs due to increased risk retirements and volume. Adjustments not related to volume, including net profit booking rate adjustments, were comparable during the quarter ended March 25, 2018 to the same period in 2017.
We currently expect Aeronautics’ 2018 net sales to increase in the mid-single digit percentage range as compared to 2017 driven by increased production and sustainment volume on the F-35 program. Operating profit is expected to increase in the low-single digit percentage range, resulting in slightly lower operating profit margins.
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Missiles and Fire Control
Summary operating results for our MFC business segment were as follows (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Net sales | $ | 1,677 | $ | 1,549 | ||||||
Operating profit | 261 | 234 | ||||||||
Operating margin | 15.6 | % | 15.1 | % | ||||||
MFC’s net sales during the quarter ended March 25, 2018 increased $128 million, or 8%, compared to the same period in 2017. The increase was primarily attributable to higher net sales of approximately $70 million for increased volume on classified programs; and about $50 million for tactical missiles programs due to increased volume (primarily Long Range Stand Off (LRSO) missile and Joint Air-to-Surface Standoff Missile (JASSM)).
MFC’s operating profit during the quarter ended March 25, 2018 increased $27 million, or 12%, compared to the same period in 2017. Operating profit increased approximately $15 million for sensors and global sustainment (previously referred to as fire control) programs due to increased risk retirements, partially offset by lower operating profit due to contract mix (primarily Apache, LANTIRN® and SNIPER®); and about $15 million for air and missile defense programs due to increased risk retirements. Adjustments not related to volume, including net profit booking rate adjustments, were about $45 million higher during the quarter ended March 25, 2018 compared to the same period in 2017.
We currently expect MFC’s net sales to increase in the mid-single digit percentage range in 2018 as compared to 2017 driven primarily by key contract awards and higher volume in tactical missile programs. Operating profit is expected to also increase in the mid-single digit percentage range in 2018 as compared to 2017 driven by the increased volume. Accordingly, operating profit margin is expected to be comparable to 2017 levels.
Rotary and Mission Systems
Summary operating results for our RMS business segment were as follows (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Net sales | $ | 3,223 | $ | 3,127 | ||||||
Operating profit | 311 | 128 | ||||||||
Operating margin | 9.6 | % | 4.1 | % | ||||||
RMS’ net sales during the quarter ended March 25, 2018 increased $96 million, or 3% compared to the same period in 2017. The increase was primarily attributable to higher net sales of approximately $95 million for training and logistics solutions (TLS) programs due to higher volume on various programs; about $95 million for integrated warfare systems and sensors (IWSS) programs due to higher volume (primarily radar surveillance systems programs and the Aegis Combat System (Aegis)); and about $90 million for command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance (C6ISR) programs due to higher volume. These increases were partially offset by a decrease of $190 million for Sikorsky helicopter programs due to lower volume for government helicopter programs.
RMS’ operating profit during the quarter ended March 25, 2018 increased $183 million, or 143% compared to the same period in 2017. Operating profit increased approximately $120 million for C6ISR programs primarily due a charge for performance matters on the EADGE-T contract, which was recorded in the first quarter of 2017 and did not recur in 2018; about $50 million for Sikorsky helicopter programs primarily due to favorable cost performance; and about $10 million for TLS programs due to higher volume. Operating profit for IWSS programs was comparable in both periods as a $35 million charge for performance matters on a ground based radar program in the first quarter of 2018 was offset by increased risk retirements on other programs. Adjustments not related to volume, including net profit booking rate adjustments, were about $110 million higher during the quarter ended March 25, 2018 compared to the same period during 2017.
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We currently expect RMS’ net sales to decrease in the low-single digit percentage range as compared to 2017 driven primarily by lower volume in our Sikorsky line of business, partially offset by higher volume in our IWSS, C6ISR, and TLS lines of business. Operating profit is expected to increase in the low- to mid-double digit percentage range driven by performance improvements in the Sikorsky and C6ISR lines of business. Operating profit margins are also expected to improve from 2017 levels.
Space
Summary operating results for our Space business segment were as follows (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Net sales | $ | 2,337 | $ | 2,416 | ||||||
Operating profit | 264 | 290 | ||||||||
Operating margin | 11.3 | % | 12.0 | % | ||||||
Space’s net sales during the quarter ended March 25, 2018 decreased $79 million, or 3%, compared to the same period in 2017. The decrease was primarily attributable to approximately $100 million for government satellite programs (primarily SBIRS and AEHF) due to lower volume; and about $35 million for commercial satellite programs due to lower volume. These decreases were partially offset by an increase of approximately $60 million for strategic missile and defense systems programs due to higher volume from AWE, partially offset by lower volume for Fleet Ballistic Missile (FBM) programs.
Space’s operating profit during the quarter ended March 25, 2018 decreased $26 million, or 9%, compared to the same period in 2017. Operating profit decreased approximately $25 million for strategic missile and defense systems due to lower risk retirements (primarily FBM programs). Operating profit for commercial satellites was comparable in the first quarter of 2018 and 2017, which included a charge for approximately $25 million for a performance matter in both periods. Adjustments not related to volume, including net profit booking rate adjustments, were about $30 million lower during the quarter ended March 25, 2018 compared to the same period in 2017.
Total equity earnings recognized by Space (primarily ULA) represented approximately $85 million, or 32%, of Space’s operating profit during the quarter ended March 25, 2018, compared to approximately $80 million, or 28%, during the quarter ended March 26, 2017.
We currently expect Space's 2018 net sales to decrease in the mid-single digit percentage range compared to 2017, driven by lower volume resulting from program lifecycles on government satellite programs and lower cost on follow-on contracts. Operating profit in 2018 is expected to be comparable to 2017. As a result, operating profit margin is expected to increase slightly from 2017 levels.
FINANCIAL CONDITION
Liquidity and Cash Flows
We have a balanced cash deployment strategy to enhance stockholder value and position ourselves to take advantage of new business opportunities when they arise. Consistent with that strategy, we have continued to invest in our business, including capital expenditures, independent research and development and have made selective business acquisitions and investments, while returning cash to stockholders through dividends and share repurchases, and managing our debt levels, maturities and interest rates, and pension obligations.
We have generated strong operating cash flows, which have been the primary source of funding for our operations, capital expenditures, debt service and repayments, dividends, share repurchases and postretirement benefit plan contributions. The total remaining authorization for future common share repurchases under our share repurchase program was $3.2 billion as of March 25, 2018.
We expect our cash from operations will continue to be sufficient to support our operations and anticipated capital expenditures for the foreseeable future. We also have access to credit markets, if needed, for liquidity or general corporate purposes, including, but not limited to, our revolving credit facility or the ability to issue commercial paper, and letters of credit to support customer advance payments and for other trade finance purposes such as guaranteeing our
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performance on particular contracts. See our “Capital Resources” section below for a discussion on financial resources available to us.
We contributed $1.5 billion to our qualified defined benefit pension plans during the quarter ended March 25, 2018 and will contribute an additional $3.5 billion during the remainder of 2018. As a result of these contributions, we do not expect any material qualified defined benefit cash funding will be required in 2019 and 2020. We plan to fund these contributions and manage the timing of cash flows in 2018 using a mix of cash on hand and commercial paper. While we do not anticipate a need to do so, our capital structure and resources would allow us to issue new debt if circumstances change.
The following table provides a summary of our cash flow information followed by a discussion of the key elements (in millions):
Quarters Ended | ||||||||||
March 25, 2018 | March 26, 2017 | |||||||||
Cash and cash equivalents at beginning of year | $ | 2,861 | $ | 1,837 | ||||||
Operating activities | ||||||||||
Net earnings | 1,157 | 789 | ||||||||
Non-cash adjustments | 317 | 329 | ||||||||
Changes in working capital | (1,027 | ) | (160 | ) | ||||||
Other, net | 185 | 708 | ||||||||
Net cash provided by operating activities | 632 | 1,666 | ||||||||
Net cash used for investing activities | (86 | ) | (166 | ) | ||||||
Net cash used for financing activities | (1,014 | ) | (1,121 | ) | ||||||
Net change in cash and cash equivalents | (468 | ) | 379 | |||||||
Cash and cash equivalents at end of period | $ | 2,393 | $ | 2,216 | ||||||
Operating Activities
Net cash provided by operating activities decreased $1.0 billion during the quarter ended March 25, 2018 compared to the same period in 2017. The decrease in cash was primarily due to $1.5 billion in contributions to our qualified defined benefit pension plans and a decrease in cash provided by changes in working capital of $867 million, partially offset by net tax refunds of $850 million and an increase in net earnings. The decrease in cash provided by changes in working capital was largely driven by revenue recognized in excess of cash collections (primarily Sikorsky and the F-35 program).
Investing Activities
Net cash used for investing activities decreased $80 million during the quarter ended March 25, 2018, compared to the same period in 2017 primarily due to approximately $105 million of cash received as part of the final settlement of net working capital in connection with the 2016 divestiture of our Information Systems & Global Solutions business. This cash inflow was partially offset by an increase of $46 million in capital expenditures. Capital expenditures totaled $216 million and $170 million during the quarters ended March 25, 2018 and March 26, 2017. The majority of our capital expenditures were for equipment and facilities infrastructure that generally are incurred to support new and existing programs across all of our business segments. We also incur capital expenditures for information technology to support programs and general enterprise information technology infrastructure, inclusive of costs for the development or purchase of internal-use software.
Financing Activities
Net cash used for financing activities was $1.0 billion during the quarter ended March 25, 2018, compared to $1.1 billion the same period in 2017. Net cash used for financing activities during the quarters ended March 25, 2018 and March 26, 2017 was primarily driven by dividend payments and share repurchases.
During the quarters ended March 25, 2018 and March 26, 2017, we paid dividends totaling $586 million ($2.00 per share) and $544 million ($1.82 per share). In addition, we paid $300 million and $500 million during the quarter ended
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March 25, 2018 and the quarter ended March 26, 2017 to repurchase 0.9 million and 1.9 million shares of our common stock.
Cash received from the issuance of our common stock in connection with employee stock option exercises during the quarter ended March 25, 2018 and March 26, 2017 totaled $33 million and $31 million, respectively, which resulted in the issuance of 0.3 million shares of our common stock during each quarter.
Capital Resources
At March 25, 2018, we held cash and cash equivalents of $2.4 billion that was generally available to fund ordinary business operations without significant legal, regulatory, or other restrictions.
Our outstanding debt, net of unamortized discounts and issuance costs, was $14.2 billion as of March 25, 2018 and mainly is in the form of publicly-issued notes that bear interest at fixed rates. As of March 25, 2018, we were in compliance with all covenants contained in our debt and credit agreements. There were no material changes during the quarter ended March 25, 2018 to our contractual commitments as presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2017 Form 10-K that were outside the ordinary course of our business.
At March 25, 2018, we had a $2.5 billion revolving credit facility (the 5-year Facility) with various banks that is available for general corporate purposes and expires on October 9, 2022. The undrawn portion of the 5-year Facility is also available to serve as a backup facility for the issuance of commercial paper. We may request and the banks may grant, at their discretion, an increase in the borrowing capacity under the 5-year Facility of up to an additional $500 million. There were no borrowings outstanding under the 5-year Facility as of March 25, 2018.
We have agreements in place with financial institutions to provide for the issuance of commercial paper. There were no commercial paper borrowings outstanding as of March 25, 2018. However, we may as conditions warrant issue commercial paper backed by our credit facility to manage the timing of cash flows and to fund a portion of our qualified defined benefit pension contributions in 2018.
On occasion, our customers may seek deferred payment terms to purchase our products. In connection with these transactions, we may, at our customer’s request, enter into arrangements for the non-recourse sale of customer receivables to unrelated third–party financial institutions. For accounting purposes, these transactions are not discounted and are treated as a sale of receivables as we have no continuing involvement. The sale proceeds from the financial institutions are reflected in our operating cash flows on the statement of cash flows. During the quarter ended March 25, 2018, we sold approximately $103 million of customer receivables. There were no gains or losses related to sales of these receivables.
Our total deficit in equity was $111 million at March 25, 2018, a $665 million net deficit reduction from December 31, 2017. The net reduction in our deficit was primarily attributable to net earnings of $1.2 billion and amortization of $300 million in pension and other postretirement benefit plan expense and gains. These increases were partially offset by dividends declared of $573 million and the repurchase of 0.9 million shares for $300 million. As we repurchase our common shares, we reduce common stock for the $1 of par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in capital. If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings. Due to the volume of repurchases made under our share repurchase program, additional paid-in capital was reduced to zero, with the remainder of the excess purchase price over par value of $274 million recorded as a reduction of retained earnings during the quarter ended March 25, 2018.
The deficit in equity was primarily the result of recognizing the estimated impacts of the enactment of the Tax Act at December 31, 2017 and our December 31, 2017 annual re-measurement adjustment related to our postretirement benefit plans. Under Maryland law, if a corporation has a deficit in equity, it is still able to pay dividends and make share repurchases in an amount limited to its net earnings in either the current or the preceding fiscal year or from the net earnings for the preceding eight quarters and if it is otherwise able to pay its debts as these come due.
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OTHER MATTERS
Status of the F-35 Program
The F-35 program primarily consists of production contracts and sustainment activities. Production of the aircraft is expected to continue for many years given the U.S. Government’s current inventory objective of 2,456 aircraft for the U.S. Air Force, U.S. Marine Corps, and U.S. Navy; commitments from our eight international partners and three international customers; as well as expressions of interest from other countries.
Operationally, the U.S. Government continues to complete various tests, including ship trials, mission system evaluations and weapons testing, and the F-35 aircraft fleet recently surpassed 131,000 flight hours. On April 11, 2018, subsequent to the end of our first quarter, the System Development and Demonstration flight testing portion of the development contracts was completed. Progress also continues on the production of aircraft. During the quarter ended March 25, 2018, the program achieved several milestones. The first Italian built F-35B was delivered to the Italian Ministry of Defense, and the first operational Japan Air Self-Defense Force (JASDF) F-35A arrived at Misawa Air Base. This aircraft delivery marks the first of nine aircraft anticipated to create the first fifth-generation fighter squadron, as part of the JASDF’s 3rd Air Wing. The U.S. Air Force completed a successful verification of the drag chute system in Norway. Beginning in 2018, Norway will receive six aircraft annually through 2024. Lastly, the 31st Marine Expeditionary Unit F-35Bs joined the USS Wasp, forming the Wasp Amphibious Ready Group. This historic deployment offers a range of new capabilities to the Marine Expeditionary Unit, strengthening and solidifying the Marine Air-Ground Task Force. On March 28, 2018, subsequent to the end of our first quarter, the Republic of Korea Air Force debuted its first F-35A Lightning II. This delivery marks a key milestone, strengthening the combined national defenses and our global partnerships. As of March 25, 2018, we have delivered 280 production aircraft to our U.S. and international partners, and we have 221 production aircraft in backlog, including orders from our international partners.
Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft performance, program schedule, cost, and requirements as part of the DoD, Congressional, and international partners’ oversight and budgeting processes. Current program challenges include, but are not limited to, supplier and partner performance, software development, level of cost associated with life cycle operations and sustainment and warranties, receiving funding for production contracts on a timely basis, executing future flight tests, findings resulting from testing and operating the aircraft. The U.S. Government appears increasingly willing to take aggressive negotiating positions as to these challenges.
Contingencies
See “Note 8 – Legal Proceedings and Contingencies” included in our Notes to Consolidated Financial Statements for information regarding our contingent obligations, including off-balance sheet arrangements.
Critical Accounting Policies
Effective January 1, 2018, we adopted ASC 606, which changed the way we recognize revenue for certain contracts. See “Note 2 – Significant Accounting Policy Updates” included in our Notes to Consolidated Financial Statements for changes to our critical accounting policies as a result of adopting ASC 606. Other than changes to our revenue recognition policy as a result of adopting ASC 606 there have been no significant changes to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Annual Report on Form 10-K.
Goodwill
The carrying value of our Sikorsky reporting unit included goodwill of $2.7 billion as of March 25, 2018. As of December 31, 2017, we estimated that the fair value of our Sikorsky reporting unit exceeded its carrying value by a margin of approximately 25%, after adjusting for the positive impact of lower statutory tax rates due to the passage of the Tax Act on December 22, 2017. We acquired Sikorsky in November 2015 and recorded the assets acquired and liabilities assumed at fair value. Due to the acquisition and valuation, the carrying value and fair value of our Sikorsky reporting unit are currently closely aligned. Therefore, any business deterioration, contract cancellations or terminations, or negative changes in market factors could cause our sales, earnings and cash flows to decline below current projections. Similarly, market factors utilized in the impairment analysis, including long-term growth rates, discount rates and relevant comparable public company earnings multiples and transaction multiples, could negatively impact the fair value of our reporting units. Based on our assessment of these circumstances, we have determined that goodwill at our Sikorsky
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reporting unit is at risk for impairment should there be deterioration of projected cash flows, negative changes in market factors or a significant increase in the carrying value of the reporting unit.
Intangible assets
The carrying value of our Sikorsky indefinite-lived trademark intangible asset was $887 million as of March 25, 2018. As of December 31, 2017, we estimated that the fair value of this intangible asset exceeded its carrying value by a margin of approximately 20%, after adjusting for the positive impact of lower statutory tax rates due to the passage of the Tax Act on December 22, 2017. Additionally, our Sikorsky business has finite-lived customer program intangible assets with carrying values of $2.6 billion as of March 25, 2018. The carrying value and fair value of Sikorsky’s intangible assets are currently closely aligned due to the November 2015 acquisition and valuation of Sikorsky. Therefore, any business deterioration, contract cancellations or terminations, or negative changes in market factors could cause our sales to decline below current projections. Based on our assessment of these circumstances, we have determined that our Sikorsky intangible assets are at risk for impairment should there be any business deterioration, contract cancellations or terminations, or negative changes in market factors.
Recent Accounting Pronouncements
See “Note 12 – Recent Accounting Pronouncements” included in our Notes to Consolidated Financial Statements for information related to new accounting standards.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
As disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2017, we transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into foreign currency hedges such as forward and option contracts that change in value as foreign currency exchange rates change. Our other exposures to market risk have not changed materially since December 31, 2017. See “Note 9 – Fair Value Measurements” included in our Notes to Consolidated Financial Statements for additional discussion.
ITEM 4. Controls and Procedures
We performed an evaluation of the effectiveness of our disclosure controls and procedures as of March 25, 2018. The evaluation was performed with the participation of senior management of each business segment and key corporate functions, under the supervision of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were operating and effective as of March 25, 2018.
There were no changes in our internal control over financial reporting during the quarter ended March 25, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Forward-Looking Statements
This Form 10-Q contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the federal securities laws, and are based on our current expectations and assumptions. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “scheduled,” “forecast” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual results may differ materially due to factors such as:
• | our reliance on contracts with the U.S. Government, which are conditioned upon the availability of funding and can be terminated by the U.S. Government for convenience, and our ability to negotiate favorable contract terms; |
• | budget uncertainty; affordability initiatives; the risk of future sequestration under the Budget Control Act of 2011 or other budget cuts; |
• | risks related to the development, production, sustainment, performance, schedule, cost and requirements of complex and technologically advanced programs including our largest, the F-35 program; |
• | economic, industry, business and political conditions including their effects on governmental policy (including trade policy and sanctions); |
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• | our success expanding into and doing business in adjacent markets and internationally; the differing risks posed by international sales, including those involving commercial relationships with unfamiliar customers and different cultures; our ability to recover investments, which is frequently dependent upon the successful operation of ventures that we do not control; and changes in foreign national priorities, and foreign government budgets; |
• | the competitive environment for our products and services, including increased pricing pressures, competition from outside the aerospace and defense industry, and increased bid protests; |
• | planned production rates for significant programs; compliance with stringent performance and reliability standards; materials availability; |
• | the performance and financial viability of key suppliers, teammates, ventures, venture partners, subcontractors and customers; |
• | the timing and customer acceptance of product deliveries; |
• | our ability to continue to innovate and develop new products and to attract and retain key personnel and transfer knowledge to new personnel; the impact of work stoppages or other labor disruptions; |
• | the impact of cyber or other security threats or other disruptions to our businesses; |
• | our ability to implement and continue capitalization changes such as share repurchases and dividend payments (including the availability of sufficient net earnings to permit such distributions under Maryland law), pension funding as well as the pace and effect of any such capitalization changes; |
• | our ability to recover certain costs under U.S. Government contracts and changes in contract mix; |
• | the accuracy of our estimates and projections; |
• | movements in interest rates and other changes that may affect pension plan assumptions, equity, the level of the FAS/CAS adjustment and actual returns on pension plan assets; |
• | realizing the anticipated benefits of acquisitions or divestitures, ventures, teaming arrangements or internal reorganizations, and our efforts to increase the efficiency of our operations and improve the affordability of our products and services; |
• | risk of an impairment of goodwill, investments or other long-term assets, including the potential impairment of goodwill, intangible assets and inventory recorded as a result of the acquisition of the Sikorsky business if it does not perform as expected, has a deterioration of projected cash flows, negative changes in market factors, including oil and gas trends, or a significant increase in carrying value of the reporting unit; |
• | the adequacy of our insurance and indemnities; |
• | the effect of changes in (or the interpretation of): legislation, regulation or policy, including those applicable to procurement (including competition from fewer and larger prime contractors), cost allowability or recovery, accounting, taxation (including the impact of the Tax Cuts and Jobs Act), or export; and |
• | the outcome of legal proceedings, bid protests, environmental remediation efforts, government investigations or government allegations that we have failed to comply with law, other contingencies and U.S. Government identification of deficiencies in our business systems. |
These are only some of the factors that may affect forward-looking statements contained in this Form 10-Q. For a discussion identifying additional important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see our filings with the U.S. Securities and Exchange Commission (SEC) including, but not limited to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 and subsequent Quarterly Reports on Form 10-Q. Our filings may be accessed through the Investor Relations page of our website, www.lockheedmartin.com/investor, or through the website maintained by the SEC at www.sec.gov.
Our actual financial results likely will be different from those projected due to the inherent nature of projections. Given these uncertainties, forward-looking statements should not be relied on in making investment decisions. The forward-looking statements contained in this Form 10-Q speak only as of the date of its filing. Except where required by applicable law, we expressly disclaim a duty to provide updates to forward-looking statements after the date of this Form 10-Q to reflect subsequent events, changed circumstances, changes in expectations, or the estimates and assumptions associated with them. The forward-looking statements in this Form 10-Q are intended to be subject to the safe harbor protection provided by the federal securities laws.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are a party to or have property subject to litigation and other proceedings that arise in the ordinary course of our business, including matters arising under provisions relating to protection of the environment, and are subject to contingencies related to certain businesses we previously owned. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of these matters will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular interim reporting period. We cannot predict the outcome of legal or other proceedings with certainty. These matters include the proceedings summarized in “Note 8 – Legal Proceedings and Contingencies” included in our Notes to Consolidated Financial Statements and “Note 14 – Legal Proceedings, Commitments and Contingencies” in our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K) filed with the U.S. Securities and Exchange Commission.
We are subject to federal, state, local and foreign requirements for protection of the environment, including those for discharge of hazardous substances and remediation of contaminated sites. As a result, we are a party to or have our property subject to various lawsuits or proceedings involving environmental protection matters. Due in part to their complexity and pervasiveness, such requirements have resulted in us being involved with related legal proceedings, claims and remediation obligations. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see “Note 8 – Legal Proceedings and Contingencies” included in our Notes to Consolidated Financial Statements. See also “Critical Accounting Policies – Environmental Matters” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 14 – Legal Proceedings, Commitments and Contingencies”, each in our 2017 Form 10-K for a description of previously reported matters.
As a U.S. Government contractor, we are subject to various audits and investigations by the U.S. Government to determine whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, suspension, proposed debarment, debarment from eligibility for future U.S. Government contracting or suspension of export privileges. Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S. Government. U.S. Government investigations often take years to complete and many result in no adverse action against us. We also provide products and services to customers outside of the U.S., which are subject to U.S. and foreign laws and regulations and foreign procurement policies and practices. Our compliance with local regulations or applicable U.S. Government regulations also may be audited or investigated.
ITEM 1A. Risk Factors
While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. “Item 1A. Risk Factors” of our 2017 Form 10-K describes some of the risks and uncertainties associated with our business, including U.S. Government funding, as further described in the “Industry Considerations” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q. These risks and uncertainties have the potential to materially affect our business, results of operations, financial condition, cash flows, projected results and future prospects. We do not believe that there have been any material changes to the risk factors disclosed in our 2017 Form 10-K.
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended March 25, 2018.
The following table provides information about our repurchases of our common stock that is registered pursuant to Section 12 of the Securities Exchange Act of 1934 during the quarter ended March 25, 2018.
Period (a) | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b) | Amount Available for Future Share Repurchases Under the Plans or Programs (b) | ||||||||||||
(in millions) | ||||||||||||||||
January 1, 2018 – January 28, 2018 | 285,252 | $ | 329.79 | 285,083 | $ | 3,409 | ||||||||||
January 29, 2018 – February 25, 2018 | 538,014 | $ | 349.57 | 232,967 | $ | 3,328 | ||||||||||
February 26, 2018 – March 25, 2018 | 366,711 | $ | 340.51 | 366,711 | $ | 3,203 | ||||||||||
Total | 1,189,977 | (c) | $ | 342.04 | 884,761 | |||||||||||
(a) | We close our books and records on the last Sunday of each month to align our financial closing with our business processes, except for the month of December, as our fiscal year ends on December 31. As a result, our fiscal months often differ from the calendar months. For example, March 25, 2018 was the last day of our March 2018 fiscal month. |
(b) | In October 2010, our Board of Directors approved a share repurchase program pursuant to which we are authorized to repurchase our common stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices. From time to time, our Board of Directors authorizes increases to our share repurchase program. The total remaining authorization for future common share repurchases under our share repurchase program was $3.2 billion as of March 25, 2018. Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. This includes purchases pursuant to Rule 10b5-1 plans. The program does not have an expiration date. |
(c) | During the quarter ended March 25, 2018, the total number of shares purchased included 305,216 shares that were transferred to us by employees in satisfaction of tax withholding obligations associated with the vesting of restricted stock units and performance stock units. These purchases were made pursuant to a separate authorization by our Board of Directors and are not included within the program. |
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ITEM 6. Exhibits
Exhibit No. | Description | |
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
15 | ||
31.1 | ||
31.2 | ||
32 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Lockheed Martin Corporation | ||
(Registrant) | ||
Date: April 25, 2018 | By: /s/ Brian P. Colan | |
Brian P. Colan | ||
Vice President and Controller | ||
(Duly Authorized Officer and Chief Accounting Officer) | ||
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Exhibit 10.1
Restricted Stock Units (Annual)
Award Date: February 22, 2018
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING
SECURITIES THAT HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
Dear Awardee:
On behalf of the Management Development and Compensation Committee (“Committee”) of the Board of Directors, I am pleased to tell you that the Committee has awarded you Restricted Stock Units (“RSUs”). Each RSU entitles you, upon satisfaction of the continuous employment and other requirements set forth in this letter and the Plan, to receive from Lockheed Martin Corporation (“Corporation”): (i) one (1) share of the Corporation’s common stock, par value $1.00 per share (“Stock”); and (ii) a cash payment equal to the sum of any cash dividends paid to stockholders of the Corporation during the Restricted Period (as defined below), each in accordance with the terms of this letter, the Lockheed Martin Corporation 2011 Incentive Performance Award Plan (“Plan”), as amended, and any rules and procedures adopted by the Committee.
This letter constitutes the Award Agreement for your RSUs and sets forth some of the terms and conditions of your Award under the Plan, as determined by the Committee. Additional terms and conditions, including tax information, are contained in the Plan and in the Prospectus relating to the Plan of which the Plan and this Award Agreement are a part. In the event of a conflict between this letter and the Plan, the Plan document will control. The number of RSUs awarded to you and the Prospectus are available at http://www.stockplanconnect.com.
The term Restricted Stock Unit or RSU as used in this Award Agreement refers only to the Restricted Stock Units awarded to you under this Award Agreement. References to the “Corporation” include Lockheed Martin Corporation and its Subsidiaries.
Except as described in Section 9, your Award is not effective or enforceable until you properly acknowledge your acceptance of the Award by completing the electronic receipt or returning an executed copy of this Award Agreement to the Vice President of Compensation and Performance Management as instructed below as soon as possible but in no event later than May 31, 2018. Except as described in Section 9, if you do not properly acknowledge your acceptance of this Award Agreement on or before May 31, 2018, this Award will be forfeited.
Assuming prompt and proper acknowledgement of your acceptance of this Award Agreement as described above and in Section 9, this Award will be effective as of the Award Date. Acceptance of this Award Agreement constitutes your consent to any action taken under the Plan consistent with its terms with respect to this Award and your agreement to be bound by the restrictions contained in Section 15 and Exhibit A (“Post-Employment Conduct Agreement”) and Exhibit B (“Stock Ownership Requirements”), as amended from time to time.
Award Date: February 22, 2018
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1. | CONSIDERATION FOR AWARD |
The consideration for the RSUs is your continued service to the Corporation as an Employee during the Restricted Period set forth below. If you do not continue to perform services for the Corporation as an Employee during the entire Restricted Period as set forth below under “RESTRICTED PERIOD, FORFEITURE,” your Award will be forfeited in whole or in part.
2. | RIGHTS OF OWNERSHIP, RESTRICTIONS ON TRANSFER |
During the Restricted Period, your RSUs will be subject to forfeiture. Until the Restricted Period ends with respect to a particular RSU and a share of Stock is delivered to you, you generally will not have the rights and privileges of a stockholder. In particular, you will not have the right to vote your RSUs on any matter put to the stockholders of the Corporation; you may not sell, transfer, assign, pledge, use as collateral or otherwise dispose of or encumber RSUs; and you will not have the right to receive any dividends paid to stockholders or dividend equivalents on the RSUs.
Upon expiration or termination of the Restricted Period with respect to your RSUs, and subject to the forfeiture provisions set forth below, each RSU for which the restrictions have lapsed will be exchanged for a certificate (either in paper or book entry form) evidencing one (1) share of Stock issued in your name and an amount equal to the cash dividends that would have been paid to you had you owned such share from the Award Date until the expiration or termination of the Restricted Period (“Deferred Dividend Equivalents” or “DDEs”). Your shares and the cash payment for the DDEs will be delivered to you as soon as practicable, but not later than sixty (60) days after the expiration or termination of the Restricted Period, and in no event later than the March 15 following the expiration or termination of such Restricted Period.
The certificates delivered to you may contain any legend the Corporation determines is appropriate under the securities laws.
You are responsible for payment of all Taxes imposed on you as a result of the Award. The Corporation will comply with all applicable U.S. Tax withholding requirements applicable to the RSUs, the DDEs, and associated Stock. Please see the prospectus for the Plan for a discussion of certain material U.S. Tax consequences of the Award. Any withholding Tax on shares of Stock (and associated DDEs) deliverable to you will be satisfied by means of the Corporation’s reducing the number of shares of Stock (and associated DDEs) deliverable to you in respect of a vested Award. If you are an Insider at the time of income tax withholding, the Corporation will base withholding on the highest individual tax rate. If you are not an Insider at the time of income tax withholding, the Corporation will base withholding on the highest individual tax rate, unless you elect otherwise in accordance with procedures established by the Corporation during an election window offered by the Corporation. If you elect a lower tax rate for withholding, then you may owe additional taxes as a result of the payment of the Award.
If any Tax withholding is required with respect to any Award (including with respect to associated DDEs) during the Restricted Period, the Corporation generally shall accelerate vesting on a number of shares of Stock and/or DDEs with a value equal to the Tax withholding obligation and the vested shares of Stock and/or vested DDEs will be used to satisfy the Tax withholding obligation. Your Award will be reduced by the number of shares of Stock and/or DDEs that are accelerated pursuant to the prior sentence.
Award Date: February 22, 2018
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The Corporation shall also have the right to (i) offset any other obligation of the Corporation to you (including, but not limited to withholding from your salary) by an amount sufficient to satisfy the Tax withholding obligation, or (ii) require you (or your estate) to pay the Corporation an amount equal to the Tax withholding obligation.
If you are a taxpayer in a country other than the U.S., you agree to make appropriate arrangements with the Corporation or its subsidiaries for the satisfaction of all income and employment tax withholding requirements, as well as social insurance contributions applicable to the RSUs, the DDEs, and associated Stock. Please see the tax summary for your country at http://www.stockplanconnect.com. If you are a taxpayer in a country other than the U.S., you represent that you will consult with your own tax advisors in connection with this Award and that you are not relying on the Corporation for any tax advice.
If a payment under this Award constitutes nonqualified deferred compensation under Section 409A of the Code, no payment due upon termination of employment shall be made unless the termination of employment is a “separation from service” as defined in Section 409A of the Code and accompanying regulations. In the event Code section 409A(a)(2)(B)(i) applies because you are a specified employee receiving a distribution on account of a termination of employment, delivery of Stock and the DDEs may be delayed for six months from such date. Similarly, if you are an Insider subject to the reporting provisions of Section 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”), delivery of Stock following the expiration of the Restricted Period for any reason may be delayed for six months. For example, if the delivery of the Stock would result in a nonexempt short-swing transaction under Section 16(b) of the Exchange Act, delivery will be delayed until the earliest date upon which the delivery either would not result in a nonexempt short-swing transaction or would otherwise not result in liability under Section 16(b) of the Exchange Act.
After the Stock is delivered to you, you will enjoy all of the rights and privileges associated with ownership of the shares, including the right to vote on any matter put to stockholder vote, to receive dividends, and to encumber, sell or otherwise transfer the shares. You should note, however, that, while the shares would thus be free of the restrictions imposed during the Restricted Period, your ability to sell or pledge the shares may be limited under the federal securities laws or corporate policy.
In the event of your death, the Stock and cash payment for the DDEs in respect of your RSUs will be transferred to your estate.
3. | RESTRICTED PERIOD, FORFEITURE |
Except as otherwise provided in Section 4 below or as required to satisfy a Tax withholding obligation as provided in Section 2 above, all of your RSUs will be forfeited and all of your rights to the RSUs and to receive Stock for your RSUs and to receive cash payment for the DDEs will cease without further obligation on the part of the Corporation unless (i) except as described in Section 9, you personally accept this Award Agreement as provided in Section 9 by May 31, 2018, and (ii) you provide services to the Corporation as an Employee of the Corporation throughout the entire Restricted Period. The Restricted Period begins on the Award Date and terminates on February 22, 2021, subject only to the specific exceptions provided below.
Award Date: February 22, 2018
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4. | DEATH, DISABILITY, LAYOFF, RETIREMENT |
(a) | Death and Disability |
Your RSUs and the DDEs will immediately vest and no longer be subject to the continuing employment requirement if:
(i) | you die while still employed by the Corporation; or |
(ii) | you terminate employment as a result of your total disability. Your employment will be treated as terminating because of a total disability on the date you commence receiving a benefit under the Corporation’s long-term disability plan in which you participate (or, if you are not enrolled in the Corporation’s long-term disability plan, on the date on which long-term disability benefits would have commenced under the plan under which you would have been covered, had you enrolled, using the standards set forth in that plan). |
The vested RSUs will be exchanged for shares of Stock, and the DDEs will be paid in cash as soon as practicable, but no later than sixty (60) days after the date of your termination of employment, on account of death or total disability, and in no event later than March 15 following the year in which such termination occurs.
(b) | Retirement or Layoff |
If you retire or are laid off by the Corporation (including through a voluntary separation program that constitutes a window program under Code section 409A) and the effective date of your retirement or layoff is after August 22, 2018, but before February 22, 2021, you will continue to vest in your RSUs and the DDEs as if you had remained employed by the Corporation until February 22, 2021. The effective date of your retirement is the first day of the month following the date you terminate services with the Corporation. Notwithstanding the foregoing, if you are an employee who has been identified by the Corporation as subject to Divestiture (as defined in Section 6 below), and the effective date of your layoff is after the Award Date but before August 22, 2018, you will continue to vest in your RSUs and the DDEs as if you remained employed by the Corporation until February 22, 2021.
The vested RSUs will be exchanged for shares of Stock, and the related DDEs associated with the vested portion of your RSUs will be paid in cash as soon as practicable, but no later than sixty (60) days after February 22, 2021, and in no event later than March 15, 2021.
For purposes of this provision, the term “retirement” means retirement from service following attainment of (i) age 55 and ten years of service (at the time of termination), or (ii) age 65.
If you are employed in Canada, for purposes of the Award Agreement, the date of termination of employment will be the last day of actual and active employment. For the avoidance of doubt, except as may be required by applicable minimum standards legislation, no period of notice or payment in lieu of notice that is given or that ought to have been given under any applicable law or contract in respect of such termination of employment that follows or is in respect of a period after your last day of actual and active employment, if any, will be considered as extending your period of employment for purposes of determining your entitlement under this Award Agreement.
Award Date: February 22, 2018
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5. | RESIGNATION OR TERMINATION BEFORE FEBRUARY 22, 2021 |
Except where prohibited by law, if you resign or your employment otherwise terminates before February 22, 2021, other than on account of death, disability, layoff, or retirement (as described above), or Divestiture or Change in Control (as described below), you will forfeit your RSUs and the related DDEs on the date of your termination.
Except where prohibited by law, if your employment terminates before February 22, 2021, by action of the Corporation due to your misconduct, then you will forfeit your RSUs and the associated DDEs on the date of your termination. If your employment terminates due to your misconduct after August 22, 2018, but before February 22, 2021, then you will not be eligible for continued vesting under Section 4(b) of the Award Agreement, even if at the time of your termination due to misconduct you have attained (i) age 55 and ten years of service, or (ii) age 65. The business area or Enterprise Operations review committee responsible for determinations of misconduct, or the Committee if you are an Elected Officer, will determine if your employment terminates due to misconduct.
6. | DIVESTITURE |
In the event of a Divestiture (as defined below) of all or substantially all of a business operation of the Corporation and such Divestiture results in the termination of your employment with the Corporation or its subsidiaries and the transfer of such employment to the other party to the Divestiture or the entity resulting from the Divestiture (or its affiliate), then the Committee may arrange for such other party or entity to assume or continue your RSUs or substitute equivalent restricted securities for your RSUs, with the same terms and conditions that apply to your RSUs pursuant to this Award Agreement, and the remainder of this Section 6 shall not apply.
If (i) such assumption, continuance or substitution of your RSUs does not occur, (ii) the Divestiture results in the termination of your employment with the Corporation or its subsidiaries, and (iii) your employment transfers to the other party to the Divestiture or the entity resulting from the Divestiture (or its affiliate), then the following rules will apply:
(a) Prorata Vesting. You shall be eligible to receive a fraction of your RSUs and the associated DDEs with respect to such fraction. The numerator of such fraction shall equal the number of days in the Restricted Period before your employment as an Employee terminated due to the Divestiture, and the denominator shall equal the total number of days in the Restricted Period. Fractional shares shall be rounded up to the next whole share.
(b) Special Rule if Retirement Eligible. Notwithstanding Section 6(a) immediately above, if at the time your employment with the Corporation or its subsidiaries terminates due to Divestiture and transfers to the other party to the Divestiture or the resulting entity to the Divestiture (or its affiliate), you are eligible for retirement treatment under Section 4(b) above (without regard to whether your termination occurs after August 22, 2018), then the Corporation will treat you as having retired and apply the vesting provision in Section 4(b) above to your RSUs.
(c) No Further Rights. The Committee shall have complete and absolute discretion to make the determinations called for under this Section 6, and all such determinations shall be binding on you and on any person who claims all or any part of your RSUs and associated DDEs on your behalf as well as on the Corporation. If you terminate employment during the Restricted
Award Date: February 22, 2018
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Period due to Divestiture but are eligible to receive a portion of your RSUs and associated DDEs as a result of this Section 6, payment of such portion of your RSUs and associated DDEs shall be in full satisfaction of all rights you have under this Award Agreement and you will receive shares of Stock in exchange for RSUs and the cash payment for the DDEs as soon as practicable, but no later than sixty (60) days after your termination of employment with the Corporation.
For the purposes of this Section 6, the term “Divestiture” shall mean a transaction that results in the transfer of control of the business operation divested to any person, corporation, association, partnership, joint venture, limited liability company or other business entity of which less than 50% of the voting stock or other equity interests (in the case of entities other than corporations), is owned or controlled directly or indirectly by the Corporation, by one or more of the Corporation’s subsidiaries or by a combination thereof.
7. | CHANGE IN CONTROL DURING THE RESTRICTED PERIOD |
In the event of a consummation of a Change in Control during the Restricted Period, the number of RSUs subject to this Award and associated DDEs will become vested (i) on the effective date of the Change in Control if the RSUs are not assumed, continued, or equivalent restricted securities are not substituted for the RSUs by the Corporation or its successor, or (ii) if the RSUs are assumed, continued or substituted by the Corporation or its successor, on the effective date of your involuntary termination by the Corporation or its successor other than for Cause (as defined herein, not including death or Total Disability) or your voluntary termination with Good Reason (as defined herein), in either case, within the 24-month period following the consummation of the Change in Control.
In the event the RSUs and associated DDEs vest in accordance with this Section 7 (whether immediately following the Change in Control or following your termination), the shares of Stock or equivalent substituted securities in which you have become vested and the associated DDEs (less any Tax withholding) shall be delivered to you within 14 days of the date on which you become vested.
(a) | “Cause” shall mean either of the following: |
(i) | Conviction for an act of fraud, embezzlement, theft or other act constituting a felony (other than traffic-related offenses or as a result of vicarious liability); or |
(ii) | Willful misconduct that is materially injurious to the Corporation’s financial position, operating results or reputation; provided, however that no act or failure to act shall be considered “willful” unless done, or omitted to be done, by you (a) in bad faith; (b) for the purpose of receiving an actual improper personal benefit in the form of money, property or services; or (c) in circumstances where you had reasonable cause to believe that the act, omission, or failure to act was unlawful. |
(b)“Good Reason” shall mean, without your express written consent, the occurrence of any one or more of the following after the Change in Control:
Award Date: February 22, 2018
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(i) | A material and substantial reduction in the nature or status of your authority or responsibilities; |
(ii) | A material reduction in your annualized rate of base salary; |
(iii) | A material reduction in the aggregate value of your level of participation in any short or long term incentive cash compensation plan, employee benefit or retirement plan or compensation practices, arrangements, or policies; |
(iv) | A material reduction in the aggregate level of participation in equity-based incentive compensation plans; or |
(v) | Your principal place of employment is relocated to a location that is greater than 50 miles from your principal place of employment on the date the Change in Control is consummated. |
Your continued employment following an event that would constitute a basis for voluntary termination with Good Reason shall not constitute Good Reason if you consent to, or waive your rights with respect to any circumstances constituting Good Reason. In addition, the occurrence of an event described in (i) through (v) shall constitute the basis for voluntary termination for Good Reason only if you provide written notice of your intent to terminate employment within 90 days of the first occurrence of such event and the Corporation has had at least 30 days from the date on which such notice is provided to cure such occurrence. If you do not terminate employment for Good Reason within 180 days after the first occurrence of the applicable grounds, then you will be deemed to have waived your right to terminate for Good Reason with respect to such grounds.
8. | AMENDMENT AND TERMINATION OF PLAN OR AWARDS |
As provided in Section 9 of the Plan, subject to certain limitations contained within Section 9, the Board of Directors may at any time amend, suspend or discontinue the Plan and the Committee may at any time alter or amend this Award Agreement. Notwithstanding Section 9 of the Plan, no such amendment, suspension or discontinuance of the Plan or alteration or amendment of Award Agreements will, except with your express written consent, adversely affect your rights under this Award Agreement. This Award Agreement shall not be amended or interpreted in a manner that is reasonably believed to result in the imposition of Tax under Code section 409A.
9. | ACCEPTANCE OF AWARD |
No Award is enforceable until you properly acknowledge your acceptance by completing the electronic receipt or returning an executed copy of this Award Agreement to the Vice President of Compensation and Performance Management as soon as possible but in no event later than May 31, 2018. Acceptance of this Award Agreement must be made only by you personally or by a person acting pursuant to a power of attorney in the event of your inability to acknowledge your acceptance (and not by your estate, your spouse or any other person) and constitutes your consent to any action taken under the Plan consistent with its terms with respect to this Award. Notwithstanding the foregoing, this Award will be enforceable and deemed accepted, and will not be forfeited, if you are unable to accept this Award Agreement personally by May 31, 2018, due to your death, disability, incapacity, deployment in the Armed Forces, or similar unforeseen circumstance as determined by the Corporation in its discretion. The Committee has authorized
Award Date: February 22, 2018
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electronic means for the delivery and acceptance of this Award Agreement. If you desire to accept this Award, you must acknowledge your acceptance and receipt of this Award Agreement, either electronically or by signing and returning a copy of this letter on or before May 31, 2018, as follows:
(a) | Electronic Acceptance: Go to http://www.stockplanconnect.com; or |
(b)By Mail: Nick Lossia, Vice President of Compensation and Performance Management, Lockheed Martin Corporation, Mail Point 126, 6801 Rockledge Drive, Bethesda, MD 20817.
Assuming prompt and proper acknowledgment of this Award Agreement as described above, this Award will be effective as of the Award Date.
Except as described above, if you do not personally acknowledge your acceptance of this Award Agreement on or before May 31, 2018, this Award will be forfeited as noted above.
10. | POST-EMPLOYMENT COVENANTS |
Except where prohibited by law, by accepting this Award Agreement as described in Section 9, you agree to the terms of the Post-Employment Conduct Agreement contained in Exhibit A to this Award Agreement.
11. | STOCK OWNERSHIP REQUIREMENTS |
Except where prohibited by law, by accepting this Award Agreement through the procedure described in Section 9, you acknowledge receipt of the Stock Ownership Requirements (“Ownership Requirements”) attached as Exhibit B and agree to comply with such Ownership Requirements as amended from time to time. If you are not a Vice President (or above) on February 22, 2018, but you are promoted to Vice President (or above) prior to February 22, 2021, the Ownership Requirements as in effect at that time shall become applicable to you on the date of your promotion to Vice President (or above).
12. | DATA PRIVACY CONSENT FOR EMPLOYEES LOCATED OUTSIDE OF THE UNITED STATES |
To the extent recognized under applicable law, you hereby explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your Personal Data (defined below) as described in this Award Agreement by and among the Corporation for the exclusive purpose of implementing, administering and managing your participation in the Plan.
You understand that the Corporation collects, holds, uses, and processes certain information about you, including, but not limited to, your name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares or directorships held in the Corporation, details of all awards or any other entitlement to shares awarded, canceled, exercised, vested, unvested or outstanding in your favor, for the purpose of implementing, administering and managing the Plan (“Personal Data”). The Corporation acts as the controller/owner of this Personal Data, and processes this Personal Data for purposes of implementing, administering, and managing the Plan. The Corporation protects the Personal Data that it receives in the United States from the European Union in accordance with the EU-U.S. Privacy Shield. You can obtain further information about Privacy Shield in the
Award Date: February 22, 2018
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Corporation's European Employee Privacy Notice, which can currently be accessed through the Corporation's Cross Function Procedure CRX-017.
You understand that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in your country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than your country. You may request a list with the names and addresses of any third party recipients of the Personal Data by contacting your local human resources representative. Where disclosing Personal Data to these third parties, the Corporation provides appropriate safeguards for protecting the transfer of your Personal Data, such as establishing standard data protection clauses with the third parties as adopted by the European Commission. You may request a copy of, or information about, such safeguards by contacting your local human resources representative. You authorize these third party recipients to receive, possess, use, retain and transfer your Personal Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Personal Data as may be required to a broker or other third party with whom the Corporation may elect to administer the settlement of any award. You understand that Personal Data will be held only as long as is necessary to implement, administer and manage your participation in the Plan and comply with applicable legal requirements.
To the extent provided by your local law, you may, at any time, have the right to request: access to your Personal Data, rectification of your Personal Data, erasure of your Personal Data, restriction of processing of your Personal Data, and portability of your Personal Data. You may also have the right to object, on grounds related to a particular situation, to the processing of your Personal Data, as well as to refuse or withdraw the consents herein, in any case without cost, by contacting in writing your local human resources representative. You understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact your local human resources representative.
13. | EMPLOYEE ACKNOWLEDGEMENT |
You acknowledge and agree as follows:
(a)the Plan is discretionary in nature and that the Committee may amend, suspend, or terminate it at any time;
(b)the grant of the RSUs is voluntary and occasional and does not create any contractual or other right to receive future grants of any RSUs, or benefits in lieu of any RSUs even if RSUs have been granted repeatedly in the past;
(c)all determinations with respect to such future RSUs, if any, including but not limited to the times when RSUs shall be granted or when RSUs shall vest, will be at the sole discretion of the Committee;
(d)your participation in the Plan is voluntary;
(e)the value of the RSUs is an extraordinary item of compensation, which is outside the scope of your employment contract (if any), except as may otherwise be explicitly provided in your employment contract;
Award Date: February 22, 2018
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(f)the RSUs are not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculating termination, severance, resignation, redundancy, end of service, or similar payments, or bonuses, long-service awards, pension or retirement benefits;
(g)the RSUs shall expire upon termination of your employment for any reason except as may otherwise be explicitly provided in the Plan and this Award Agreement;
(h)the future value of the shares is unknown and cannot be predicted with certainty;
(i)no claim or entitlement to compensation or damages arises from the termination of the RSUs or diminution in value of the RSUs or Stock and you irrevocably release the Corporation and your employer from any such claim that may arise; and
(j)if I am a resident of Turkey, that the offer of this Award has been made by the Corporation to you personally in connection with your existing relationship with the Corporation or one or more of its affiliates, subsidiaries and/or related companies, and further, that the Award, the related shares of the Stock and the related offer thereof are not subject to regulation by any securities regulator in Turkey, or otherwise outside of the U.S.
14. | ENGLISH LANGUAGE |
You have received the terms and conditions of this Award Agreement and any other related communications, and you consent to having received these documents in English. If you have received this Award Agreement or any other documents related to the Plan translated into a language other than English, and if the translated version is different from the English version, the English version will control.
Quebec Residents Only: The Parties have agreed that this Award Agreement, the Plan as well as any notice, document or instrument relating to them be drawn up in English only. You acknowledge that, upon your reasonable request, the Corporation will provide a French translation of such documents to you. Les parties aux présentes ont convenu que la présente accord, le "Plan," ainsi que tous autres avis, actes ou documents s'y rattachant soient rédigés en anglais seulement. Vous reconnaissez que, à votre demande raisonnable, "the Corporation" fournit une traduction française de ces documents à vous.
15. | ELECTRONIC DELIVERY |
By executing this Award Agreement, you consent to receive copies of the Prospectus applicable to this Award from this internet site (http://www.stockplanconnect.com) as well as to electronic delivery of the Corporation’s annual report on Form 10-K, annual proxy statement and quarterly reports on Form 10-Q. This consent can only be withdrawn by written notice to the Vice President of Compensation and Performance Management at the address noted above. The Corporation may, in its sole discretion, decide to deliver any documents related to RSUs awarded under the Plan or future RSUs that may be awarded under the Plan by electronic means or request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and agree to participate in the Plan through any on-line or electronic system established and maintained by the Corporation or another third party designated by the Corporation.
Award Date: February 22, 2018
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16. | CURRENCY EXCHANGE RISK |
If your functional currency is not the U.S. dollar, you agree and acknowledge that you will bear any and all risk associated with the exchange or fluctuation of currency associated with the RSUs, including without limitation sale of the Shares and payment of DDEs (the “Currency Exchange Risk”). Any cash payments due to you under this Award Agreement will be converted to your functional currency at the rate determined by the Corporation, in its discretion, on the last day of the Restricted Period. You waive and release the Corporation and its subsidiaries from any potential claims arising out of the Currency Exchange Risk.
17. | EXCHANGE CONTROL REQUIREMENTS |
You agree and acknowledge that you will comply with any and all exchange control requirements applicable to the RSUs and the sale of Shares and any resulting funds including, without limitation, reporting or repatriation requirements.
18. | MISCELLANEOUS |
If you are on leave of absence, for the purposes of the Plan, you will be considered to still be in the employ of the Corporation unless otherwise provided in an agreement between you and the Corporation.
Nothing contained in this Award Agreement shall confer upon you any right of continued employment by the Corporation or guarantee that any future awards will be made to you under the Plan. In addition, nothing in this Award Agreement limits in any way the right of the Corporation to terminate your employment at any time. Neither the value of the RSUs awarded to you nor the DDEs will be taken into account for other benefits offered by the Corporation, including but not limited to pension benefits. Notwithstanding any other provision of this Award Agreement to the contrary, no Stock will be issued to you pursuant to this Award Agreement within six months from the Award Date.
Transactions involving Stock delivered under this Award Agreement are subject to the securities laws and CPS 722 (a copy of which has been made available to you). Among other things, CPS 722 prohibits employees of the Corporation from engaging in transactions that violate securities laws or involve hedging or pledging stock. Insiders are subject to additional restrictions. The Corporation recommends that Insiders consult with the Senior Vice President, General Counsel and Corporate Secretary or her staff before entering into any transactions involving Stock or RSUs.
You have no rights as a stockholder to any securities covered by this Award Agreement until the date on which you become the holder of record of such securities. Capitalized terms used, but not defined herein, shall have the meanings ascribed to them in the Plan.
Award Date: February 22, 2018
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Sincerely,
Patricia L. Lewis
Senior Vice President,
Human Resources
(For written acceptance, please complete, sign, and return by mail.)
By accepting this Award Agreement as described in Section 9, employees outside the United States are consenting to the processing of Personal Data as described in Section 12.
Signed by:
Signature | Date | |
Print Name | Employee ID | |
Award Date: February 22, 2018
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Exhibit A
Post-Employment Conduct Agreement
(RSU Grant)
This Post-Employment Conduct Agreement (this “PECA”) attached as Exhibit A to the Award Agreement with an Award Date of February 22, 2018, (the “Award Agreement”) is entered into in consideration of, among other things, the grant of restricted stock units to me under the Award Agreement (the “RSUs”) pursuant to the Lockheed Martin Corporation 2011 Incentive Performance Award Plan, as amended (the “Plan”). References to the “Corporation” shall include Lockheed Martin Corporation and its Subsidiaries. By accepting the RSUs, I agree as follows:
1.Restrictions Following Termination of Employment.
(a)Covenant Not To Compete – Without the express written consent of the ”Required Approver” (as defined in Section 6), during the one-year period (or two-year period for Elected Officers) following the date of my termination of employment (the “Termination Date”) with the Corporation, I will not, directly or indirectly, be employed by, provide services to, or advise a “Restricted Company” (as defined in Section 6), whether as an employee, advisor, director, officer, partner or consultant, or in any other position, function or role that, in any such case,
(i) | oversees, controls or affects the design, operation, research, manufacture, marketing, sale or distribution of “Competitive Products or Services” (as defined in Section 6) of or by the Restricted Company, or |
(ii) | would involve a substantial risk that the “Confidential or Proprietary Information” (as defined in Section 1(c) below) of the Corporation (including but not limited to technical information or intellectual property, strategic plans, information relating to pricing offered to the Corporation by vendors or suppliers or to prices charged or pricing contemplated to be charged by the Corporation, information relating to employee performance, promotions or identification for promotion, or information relating to the Corporation’s cost base) could be used to the disadvantage of the Corporation. |
Section 1(a)(i) and (ii) shall not apply to residents of California.
To the extent permitted by applicable law, including but not limited to any applicable rules governing attorney conduct (such as the ABA Model Rules of Professional Conduct and state versions thereof), Sections 1(a)(i) and (ii) and Section 1(b) relating to non-solicitation, shall apply to individuals who are employed by the Corporation in an attorney position and whose occupation during the one-year (or two-year, for Elected Officers) period following employment with the Corporation does not include practicing law.
In lieu of Section 1(a)(i) and (ii), as well as Section 1(b) relating to non-solicitation, the following Section 1(a)(iii) shall apply to individuals who are employed by the Corporation in an attorney position, and whose occupation during the one-year (or two-year, for Elected Officers) period following employment with the Corporation includes practicing law.
(iii) | Post-Employment Activity As a Lawyer – I acknowledge that as counsel to the Corporation, I owe ethical and fiduciary obligations to the Corporation |
Award Date: February 22, 2018
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and that at least some of these obligations will continue even after my Termination Date with the Corporation. I agree that after my Termination Date I will comply fully with all applicable ethical and fiduciary obligations that I owe to the Corporation. To the extent permitted by applicable law, including but not limited to any applicable rules governing attorney conduct, I agree that I will not:
a. | Represent any client in the same or a substantially related matter in which I represented the Corporation where the client’s interests are materially adverse to the Corporation; or |
b. | Disclose confidential information relating to my representation of the Corporation, including the disclosure of information that is to the disadvantage of the Corporation, except for information that is or becomes generally known. |
The Corporation’s Senior Vice President, General Counsel, and Corporate Secretary or the General Tax Counsel, as applicable, will determine in his or her discretion whether an individual is employed by the Corporation in an attorney position.
(b)Non-Solicit – Without the express written consent of the Required Approver, during the two-year period following the Termination Date, I will not (i) cause or attempt to cause, directly or indirectly, the complete or partial loss of any contract in effect before the Termination Date between the Corporation and any customer, supplier, distributor or manufacturer of or to the Corporation with which I was responsible, in whole or in part, for soliciting, negotiating, implementing, managing, or overseeing or (ii) induce or attempt to induce, directly or indirectly, any person who is an employee of the Corporation with whom I worked or interacted with within two years prior to the Termination Date to cease employment with the Corporation in order to perform work or services for any entity other than the Corporation.
(c)Protection of Proprietary Information – Except to the extent required by law, following my Termination Date, I will have a continuing obligation to comply with the terms of any non-disclosure or similar agreements that I signed while employed by the Corporation committing to hold confidential the “Confidential or Proprietary Information” (as defined below) of the Corporation or any of its affiliates, subsidiaries, related companies, joint ventures, partnerships, customers, suppliers, partners, contractors or agents, in each case in accordance with the terms of such agreements. I will not use or disclose or allow the use or disclosure by others to any person or entity of Confidential or Proprietary Information of the Corporation or others to which I had access or that I was responsible for creating or overseeing during my employment with the Corporation. In the event I become legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand or otherwise) to disclose any proprietary or confidential information, I will immediately notify the Corporation’s Senior Vice President, General Counsel and Corporate Secretary as to the existence of the obligation and will cooperate with any reasonable request by the Corporation for assistance in seeking to protect the information. All materials to which I have had access, or which were furnished or otherwise made available to me in connection with my employment with the Corporation shall be and remain the property of the Corporation. For purposes of this PECA, “Confidential or Proprietary Information” means Proprietary Information within the meaning of CRX-015C (a copy of which has been made available to me), including but not limited to information that a person or entity desires to protect from unauthorized disclosure to third parties that can provide the person or entity with a business, technological, or economic
Award Date: February 22, 2018
Page 15
advantage over its competitors, or which, if known or used by third parties or if used by the person’s or entity’s employees or agents in an unauthorized manner, might be detrimental to the person’s or entity’s interests. Confidential or Proprietary Information may include, but is not limited to:
(i) | existing and contemplated business, marketing and financial business information such as business plans and methods, marketing information, cost estimates, forecasts, financial data, cost or pricing data, bid and proposal information, customer identification, sources of supply, contemplated product lines, proposed business alliances, and information about customers and competitors, |
(ii) | existing and contemplated technical information and documentation pertaining to technology, know how, equipment, machines, devices and systems, computer hardware and software, compositions, formulas, products, processes, methods, designs, specifications, mask works, testing or evaluation procedures, manufacturing processes, production techniques, research and development activities, inventions, discoveries, and improvements, and |
(iii) | human resources and personnel information. |
(d)No Disparagement – Following the Termination Date, I will not make any statements, whether verbal or written, that disparage or reasonably may be interpreted to disparage the Corporation or its directors, officers, employees, technology, products or services with respect to any matter whatsoever.
(e)Cooperation in Litigation and Investigations – Following the Termination Date, I will, to the extent reasonably requested, cooperate with the Corporation in any pending or future litigation (including alternative dispute resolution proceedings) or investigations in which the Corporation or any of its subsidiaries or affiliates is a party or is required or requested to provide testimony and regarding which, as a result of my employment with the Corporation, I reasonably could be expected to have knowledge or information relevant to the litigation or investigation. Notwithstanding any other provision of this PECA, nothing in this PECA shall affect my obligation to cooperate with any governmental inquiry or investigation or to give truthful testimony in court.
2.Consideration and Acknowledgement. I acknowledge and agree that the benefits and compensation opportunities being made available to me under the Award Agreement are in addition to the benefits and compensation opportunities that otherwise are or would be available to me in connection with my employment by the Corporation and that the grant of the RSUs is expressly made contingent upon my agreements with the Corporation set forth in this PECA. I acknowledge that the scope and duration of the restrictions in Section 1 are necessary to be effective and are fair and reasonable in light of the value of the benefits and compensation opportunities being made available to me under the Award Agreement. I further acknowledge and agree that as a result of the high level executive and management positions I hold with the Corporation and the access to and extensive knowledge of the Corporation's Confidential or Proprietary Information, employees, suppliers and customers, these restrictions are reasonably required for the protection of the Corporation's legitimate business interests.
Award Date: February 22, 2018
Page 16
3.Remedies For Breach of Section 1; Additional Remedies of Clawback and Recoupment.
(a)I agree, upon demand by the Corporation, to forfeit, return or repay to the Corporation the “Benefits and Proceeds” (as defined below) in the event any of the following occur:
(i) | I breach any of the covenants or agreements in Section 1; |
(ii) | The Corporation determines that either (a) my intentional misconduct or gross negligence, or (b) my failure to report another person’s intentional misconduct or gross negligence of which I had knowledge during the period I was employed by the Corporation, contributed to the Corporation having to restate all or a portion of its financial statements filed for any period with the Securities and Exchange Commission; |
(iii) | The Corporation determines that I engaged in fraud, bribery, or any other illegal act, or that my intentional misconduct or gross negligence (including the failure to report another person’s intentional misconduct or gross negligence of which I had knowledge during the period I was employed by the Corporation) contributed to another person’s fraud, bribery, or other illegal act, which in any such case adversely affected the Corporation’s financial position or reputation; or |
(iv) | Under such other circumstances specified by final regulation issued by the Securities and Exchange Commission entitling the Corporation to recapture or clawback “Benefits and Proceeds” (as defined below). |
(b)The remedy provided in Section 3(a) shall not be the exclusive remedy available to the Corporation for any of the conduct described in Section 3(a) and shall not limit the Corporation from seeking damages or injunctive relief.
(c)For purposes of this Section 3, “Benefits and Proceeds” means (i) to the extent I own Stock issued in respect of vested RSUs, such Stock; (ii) to the extent I no longer own the shares of Stock of the Corporation issued in respect of the RSUs, cash in an amount equal to the greater of (x) the value of such Stock on the date the associated RSUs vested (which, unless otherwise determined by the Management Development and Compensation Committee of the Board of Directors of the Corporation, shall be equal to the closing price of the shares of Stock as finally reported by the New York Stock Exchange on such date), and (y) the proceeds received in connection with the disposition of such Stock; and (iii) to the extent I have not earned the RSUs fully, all of my remaining rights, title or interest in my Award and any accrued dividend equivalents with respect thereto.
4.Injunctive Relief. I acknowledge that the Corporation’s remedies at law may be inadequate to protect the Corporation against any actual or threatened breach of the provisions of Section 1 or the conduct described in Section 3(a), and, therefore, without prejudice to any other rights and remedies otherwise available to the Corporation at law or in equity (including but not limited to, an action under Section 3(a), the Corporation shall be entitled to the granting of injunctive relief in its favor and to specific performance without proof of actual damages and without the requirement of the posting of any bond or similar security.
Award Date: February 22, 2018
Page 17
5.Invalidity; Unenforceability. It is the desire and intent of the parties that the provisions of this PECA shall be enforced to the fullest extent permissible. Accordingly, if any particular provision of this PECA is adjudicated to be invalid or unenforceable, this PECA shall be deemed amended to delete the portion adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of this provision in the particular jurisdiction in which such adjudication is made.
6.Definitions. Capitalized terms not defined in this PECA have the meaning given to them in the Plan, as applicable. For purposes of this PECA, the following terms have the meanings given below:
(a)“Restricted Company” means The Boeing Company, General Dynamics Corporation, Northrop Grumman Corporation, the Raytheon Company, United Technologies Corporation, Honeywell International Inc., BAE Systems Inc., L-3 Communications Corporation, the Harris Corporation, Thales, Airbus Group, Inc., Textron Inc., Finmeccanica SpA, Leidos Holdings, Inc. and (i) any entity directly or indirectly controlling, controlled by, or under common control with any of the foregoing, and (ii) any successor to all or part of the business of any of the foregoing as a result of a merger, reorganization, consolidation, spin-off, split-up, acquisition, divestiture, or similar transaction.
(b)“Competitive Products or Services” means products or services that compete with, or are an alternative or potential alternative to, products sold or services provided by a subsidiary, business area, division or operating unit or business of the Corporation as of the Termination Date and at any time within the two-year period ending on the Termination Date; provided, that, (i) if I had direct responsibility for the business of, or function with respect to, a subsidiary, or for a business area, division or operating unit or business of the Corporation at any time within the two-year period ending on the Termination Date, Competitive Products or Services includes the products so sold or the services so provided during that two-year period by the subsidiary, business area, division or operating unit of the Corporation for which I had responsibility, and (ii) if I did not have direct responsibility for the business of, or function with respect to, a subsidiary, or for a business area, division or operating unit or business of the Corporation at any time within the two-year period ending on the Termination Date, Competitive Products or Services includes the products so sold or the services so provided by a subsidiary, business area, division or operating unit of the Corporation for which I had access (or was required or permitted such access in the performance of my duties or responsibilities with the Corporation) to Confidential or Proprietary Information of the Corporation at any time during the two-year period ending on the Termination Date.
(c)“Required Approver” means:
(i) | with respect to the Chief Executive Officer and President, the Management Development and Compensation Committee of the Corporation’s Board of Directors; |
(ii) | with respect to any Elected Officer (other than the Chief Executive Officer and President), the Corporation’s Chief Executive Officer; or |
(iii) | with respect to all other employees, the Senior Vice President, Human Resources of the Corporation. |
Award Date: February 22, 2018
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(d)“Elected Officer” means an officer of the Corporation who was elected to his or her position by the Corporation’s Board of Directors.
7.Miscellaneous.
(a)The Plan, the Award Agreement (with Exhibit B) and this PECA constitute the entire agreement governing the terms of the award of the RSUs to me.
(b)This PECA shall be governed by Maryland law, without regard to its provisions governing conflicts of law. Any enforcement of, or challenge to, this PECA may only be brought in the United States District Court for the District of Maryland, unless such court determines that it does not have subject matter jurisdiction, in which case any such enforcement or challenge may be brought in the Circuit Court of Maryland. Both parties consent to the proper jurisdiction and venue of such court, as applicable, for the purpose of enforcing or challenging this PECA.
(c)This PECA shall inure to the benefit of the Corporation’s successors and assigns and may be assigned by the Corporation without my consent.
(d)This PECA provides for certain obligations on my part following the Termination Date and shall not, by implication or otherwise, affect in any way my obligations to the Corporation during the term of my employment by the Corporation, whether pursuant to written agreements between the Corporation and me, the provisions of applicable Corporate policies that may be adopted from time to time or applicable law or regulation.
This PECA is effective as of the acceptance by me of the award of RSUs under the Award Agreement and is not contingent on the vesting of my RSUs.
Award Date: February 22, 2018
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Exhibit B
Stock Ownership Requirements
Lockheed Martin’s Stock Ownership Requirements for Key Employees apply to all senior level positions of Vice President and above. This reflects the expectations of our major shareholders that management demonstrate its confidence in Lockheed Martin through a reasonable level of personal share ownership. This practice is consistent with other major U.S. corporations which link some portion of personal financial interests of key employees with those of shareholders.
Stock Ownership Requirements
Title | Annual Base Pay Multiple |
Chairman, President, and Chief Executive Officer | 6 times |
Chief Operating Officer | 5 times |
Chief Financial Officer | 4 times |
Executive Vice Presidents | 3 times |
Senior Vice Presidents | 2 times |
Other Elected Officers | 2 times |
Other Vice Presidents | 1 times |
Satisfaction of Requirements
Covered employees may satisfy their ownership requirements with common stock in these categories:
• | Shares owned directly. |
• | Shares owned by a spouse or a trust. |
• | Shares represented by monies invested in 401(k) Company Common Stock Funds or comparable plans. |
• | Share equivalents as represented by income deferred to the Company Stock Investment Option of the Deferred Management Incentive Compensation Plan (DMICP). |
• | Unvested Restricted Stock Units. |
Key employees will be required to achieve the appropriate ownership level within five years and are expected to make continuous progress toward their target. Appointment to a new level will reset the five year requirement. Unexercised options prior to vesting are not counted toward meeting the guidelines.
Holding Period
Covered employees must retain net vested Restricted Stock Units and Performance Stock Units and the net shares resulting from any exercise of stock options if the ownership requirements are not yet satisfied.
Covered employees are asked to report annually on their progress toward attainment of their share ownership goals.
Exhibit 10.2
Performance Stock Units (Annual)
Award Date: February 22, 2018
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING
SECURITIES THAT HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
Re: | Lockheed Martin Corporation 2011 Incentive Performance Award Plan: Performance Stock Unit Award (2018-2020 Performance Period) |
Dear Awardee:
On behalf of the Management Development and Compensation Committee (the “Committee”) of the Board of Directors of Lockheed Martin Corporation, I am pleased to tell you that you have been granted a Performance Stock Unit Award (“PSUs”) under the Corporation’s 2011 Incentive Performance Award Plan, as amended (the “Plan”). The purpose of this letter is to serve as the PSU Award Agreement and to set forth your Target Award as well as the terms and conditions to the payment of your Award. Additional terms and conditions are set forth in the Plan and in the Prospectus relating to the Plan of which the Plan document and this Award Agreement are a part. Your Target Award and the Prospectus are available at http://www.stockplanconnect.com. You should retain the Prospectus and the attached copy of the Plan in your records.
Except as described in Section 18, your Award is not effective or enforceable until you properly acknowledge your acceptance of the Award by completing the electronic receipt or returning an executed copy of this Award Agreement to the Vice President of Compensation and Performance Management as instructed below as soon as possible but in no event later than May 31, 2018. Except as described in Section 18, if you do not properly acknowledge your acceptance of this Award Agreement on or before May 31, 2018, this Award will be forfeited.
Assuming prompt and proper acknowledgement of your acceptance of this Award Agreement as described above and in Section 18, this Award will be effective as of the Award Date. Acceptance of this Award Agreement constitutes your consent to any action taken under the Plan consistent with its terms with respect to this Award and your agreement to be bound by the restrictions contained in Section 18 and in Exhibit A (“Post-Employment Conduct Agreement”) and Exhibit B (“Stock Ownership Requirements”), as amended from time to time, except where prohibited by law.
The Corporation will comply with all applicable U.S. Tax withholding requirements applicable to the PSUs, the DDEs, and associated Stock. Please see the prospectus for the Plan for a discussion of certain material U.S. Tax consequences of the Award. If you are a taxpayer in a country other than the U.S., you agree to make appropriate arrangements with the Corporation or its subsidiaries for the satisfaction of all income and employment tax withholding requirements, as well as social insurance contributions applicable to the PSUs, the DDEs, and associated Stock.
Award Date: February 22, 2018
Page 2
Please see the tax summary for your country at http://www.stockplanconnect.com. If you are a taxpayer in a country other than the U.S., you represent that you will consult with your own tax advisors in connection with this Award and that you are not relying on the Corporation for any tax advice.
Any withholding Tax on your Award will be satisfied by means of the Corporation reducing the number of shares of Stock (and associated DDEs) deliverable to you in respect of a vested Award. If you are an Insider at the time of income tax withholding, the Corporation will base withholding on the highest individual tax rate. If you are not an Insider at the time of income tax withholding, the Corporation will base withholding on the highest individual tax rate, unless you elect otherwise in accordance with procedures established by the Corporation during an election window offered by the Corporation. If you elect a lower tax rate for withholding, then you may owe additional taxes as a result of the payment of the Award. The Corporation shall also have the right to (i) offset any other obligation of the Corporation to you (including, but not limited to withholding from your salary) by an amount sufficient to satisfy the Tax withholding obligation, or (ii) require you (or your estate) to pay the Corporation an amount equal to the Tax withholding obligation.
Nothing contained in this Award Agreement shall confer upon you any right of continued employment by the Corporation or guarantee that any future awards will be made to you under the Plan. In addition, nothing in this Award Agreement limits in any way the right of the Corporation to terminate your employment at any time. Neither the value of the PSUs awarded to you nor the DDEs will be taken into account for other benefits offered by the Corporation, including but not limited to pension benefits. Notwithstanding any other provision of this Award Agreement to the contrary, no Stock will be issued to you pursuant to this Award Agreement within six months from the Award Date.
Transactions involving Stock delivered under this Award Agreement are subject to the securities laws and CPS 722 (a copy of which has been made available to you). Among other things, CPS 722 prohibits employees of the Corporation from engaging in transactions that violate securities laws or involve hedging or pledging stock. Insiders are subject to additional restrictions. The Corporation recommends that Insiders consult with the Senior Vice President, General Counsel and Corporate Secretary or her staff before entering into any transactions involving Stock or PSUs.
You have no rights as a stockholder to any securities covered by this Award Agreement until the date on which you become the holder of record of such securities. Capitalized terms used, but not defined herein, shall have the meanings ascribed to them in the Plan.
Capitalized terms used in this Award Agreement either shall be defined in this Award Agreement or if not defined in this Award Agreement shall have the meaning given to the term in the Plan. The term “Target Award” as used in this Award Agreement refers only to the Target Award awarded to you under this Award Agreement and the term “Award” refers only to PSUs set forth in this Award Agreement. References to the “Corporation” include Lockheed Martin Corporation and its Subsidiaries. Appendix A contains an index of all capitalized terms used in this Award Agreement.
Award Date: February 22, 2018
Page 3
Section 1. | Shares Awarded; Performance Period; Vesting Period; Payment of Award. |
1.1 | Shares Awarded. |
(a) Target Award. Your Target Award for the Performance Period under this Award Agreement shall be the number of whole shares of Stock identified as your Performance Stock Unit (“PSU”) Target Award in your account at http://www.stockplanconnect.com. Your Target Award shall be composed of three pieces:
(i)Your Target Total Stockholder Return Performance Award (approximately 50% of the number of shares in your Target Award);
(ii)Your Target ROIC Performance Award (approximately 25% of the number of shares in your Target Award);
(iii)Your Target Cash Flow Performance Award (approximately 25% of the number of shares in your Target Award).
The Award paid to you shall be calculated in accordance with Section 2.1. The allocation of your Award among your Total Stockholder Return Performance Award, your ROIC Performance Award, and your Cash Flow Performance Award will be made by the Committee based on applicable accounting principles.
(b) Maximum Award. Your Maximum Award for the Performance Period under this Award Agreement shall be the number of shares of Stock equal to 200% of your Target Award, subject to the provisions of Section 2.1 and the caps contained therein.
(c) Deferred Dividend Equivalents (“DDEs”). Your Award shall include a payment equal to the cash dividends that would have been paid to you had you owned the numbers of whole shares of Stock equal to your final Award as determined under Section 2.1(d), from the Award Date until the end of the Performance Period.
1.2 Performance Period. The “Performance Period” under this Award Agreement is the three-year performance period that runs from January 1, 2018, until December 31, 2020.
1.3 Vesting Period. The “Vesting Period” under this Award Agreement is the three-year period that runs from February 22, 2018, until the later of (i) February 22, 2021, or (ii) the date on which the Committee certifies in writing that an amount up to your Maximum Award has become an Award for the Performance Period.
1.4 Payment of Award. Your Award will be paid to you in whole shares of Stock (either in book entry or paper form) pursuant to Section 5. The final number of whole shares, if any, payable to you under your Award is dependent upon the Corporation’s performance with respect to each of the metrics described in Section 3 and Section 4, the limits described in Section 2 and your continued employment with the Corporation in accordance with Section 5. As a result of these requirements, the number of whole shares of Stock you receive at the end of the Vesting Period will be between 0% and 200% of your Target Award (based on each factor described in Section 2.1 below) and may be smaller than your Maximum Award (or the performance factors could result in no payment in respect of your Award). Any certificates delivered to you may contain any legend
Award Date: February 22, 2018
Page 4
the Corporation determines is appropriate under the securities laws. If you are an Insider subject to the reporting provisions of Section 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”), delivery of Stock in payment of your Award for any reason may be delayed for six months. For example, if the delivery of the Stock would result in a nonexempt short-swing transaction under Section 16(b) of the Exchange Act, delivery will be delayed until the earliest date upon which the delivery either would not result in a nonexempt short-swing transaction or would otherwise not result in liability under Section 16(b) of the Exchange Act.
Section 2. Calculation of Award Payments.
2.1 End of Performance Period Calculation. Following the end of the Performance Period and prior to any shares of Stock being issued,
(a)The Committee will calculate the Total Stockholder Return Performance Factor (as described in Section 3.2) based on the Corporation’s performance during the Performance Period relative to the performance of other corporations which compose the “Peer Performance Group” as defined in Section 3.1. Your Target Total Stockholder Return Performance Award (as defined in Section 1.1(a)(i)) shall be multiplied by the Total Stockholder Return Performance Factor with the resulting number of shares to be known as the Earned Total Stockholder Return Performance Award. Fractional shares shall be rounded up to the next whole share. If the Corporation’s Average TSR for the three-year Performance Period is negative, the maximum Earned Total Stockholder Return Performance Factor shall not exceed 100%. Notwithstanding the foregoing, the number of shares of Stock you receive as your Earned Total Stockholder Return Performance Award shall be reduced to the extent necessary so that the Fair Market Value of your Earned Total Stockholder Return Performance Award on the last day of the Vesting Period does not exceed the product of (a) the Fair Market Value of a share of Stock on the Award Date, multiplied by (b) 400%, multiplied by (c) the number of shares in your Earned Total Stockholder Return Performance Award.
(b)The Committee will calculate the ROIC Performance Factor (as described in Section 4.1) based on the Corporation’s ROIC during the Performance Period as compared to the projected ROIC for the Performance Period as set forth in the February 21, 2018, Committee resolution (“ROIC Target”). Your Target ROIC Performance Award (as described in Section 1.1(a)(ii)) will be multiplied by the ROIC Performance Factor with the resulting number of shares to be known as the Earned ROIC Performance Award. Fractional shares shall be rounded up to the next whole share. Notwithstanding the foregoing, the number of shares of Stock you receive as your Earned ROIC Performance Award shall be reduced to the extent necessary so that the Fair Market Value of your Earned ROIC Performance Award on the last day of the Vesting Period does not exceed the product of (a) the Fair Market Value of a share of Stock on the Award Date, multiplied by (b) 400%, multiplied by (c) the number of shares in your Earned ROIC Performance Award.
(c)The Committee will calculate the Cash Flow Performance Factor (as described in Section 4.2) based on the Corporation’s cumulative Cash Flow during the Performance Period as compared to the projected cumulative Cash Flow for the Performance Period as set forth the February 21, 2018, Committee resolution (“Cash Flow Target”). Your Target Cash Flow Performance Award (as described in Section 1.1(a)(iii) will be multiplied by the Cash Flow Performance Factor with the resulting number of shares to be known as the
Award Date: February 22, 2018
Page 5
Earned Cash Flow Performance Award. Fractional shares shall be rounded up to the next whole share. Notwithstanding the foregoing, the number of shares of Stock you receive as your Earned Cash Flow Performance Award shall be reduced to the extent necessary so that the Fair Market Value of your Earned Cash Flow Performance Award on the last day of the Vesting Period does not exceed the product of (a) the Fair Market Value of a share of Stock on the Award Date, multiplied by (b) 400%, multiplied by (c) the number of shares in your Earned Cash Flow Performance Award.
(d)Your Earned Total Stockholder Return Performance Award, your Earned ROIC Performance Award, and your Earned Cash Flow Performance Award shall be added together to determine the total number of shares to be paid to you as your final Award.
You must (except as specified in Section 5) remain employed by the Corporation through the last day of the Vesting Period to receive your Award. No portion of your Award will be payable until it is fully vested in accordance with Sections 5.1 and 5.2.
2.2 Adjustment of ROIC Target and Cash Flow Target. The Committee will adjust the ROIC Target and Cash Flow Target established as described in Section 2.1(b) and Section 2.1(c), respectively, to account for the impact of an acquisition or divestiture with a transaction value in excess of $1 billion at the time the transaction takes effect.
Section 3. Total Stockholder Return Performance Factor.
3.1. Peer Performance Group. The Total Stockholder Return Performance Factor will be based upon the relative ranking of the Corporation’s Average TSR (as defined in Section 3.2(a)) for the Performance Period to the Average TSR for such Period for each corporation in the “Peer Performance Group.” The “Peer Performance Group” shall consist of the corporations which compose the Standard and Poor’s Aerospace and Defense Index reported under symbol S5AERO by Bloomberg L.P. on January 3, 2018, as follows: Arconic Inc. (ARNC), The Boeing Company (BA), L3 Technologies, Inc. (LLL), Raytheon Company (RTN), United Technologies Corporation (UTX), Textron Inc. (TXT), Rockwell Collins, Inc. (COL), TransDigm Group Inc. (TDG), General Dynamics Corporation (GD), Northrop Grumman Corporation (NOC), Harris Corporation (HRS), and Huntington Ingalls Industries (HII). If a company in the Peer Performance Group ceases to be publicly-traded during the Performance Period, then that company will be removed from the Peer Performance Group as of the beginning of the Performance Period.
The Corporation’s Total Stockholder Return will be based on the performance of the Stock. With respect to the corporations that make up the Peer Performance Group, the Total Stockholder Return of each corporation that is taken into account in computing the Peer Performance Group Total Stockholder Return will be based on the equity security of the relevant corporation that is used in computing the Standard and Poor’s Aerospace and Defense Index.
3.2. Calculation of Total Stockholder Return Performance Factor.
(a) Calculation of Average TSR. During the Performance Period, the Committee shall compute the Total Stockholder Return (as defined in the Plan and assuming the reinvestment of any cash dividends) for the Corporation and for each other corporation in the Peer Performance Group for 36 periods during the Performance Period where each period begins on January 1, 2018 (based on the closing price for the stock on December
Award Date: February 22, 2018
Page 6
31, 2017), and ends on the last day of each successive calendar month in the Performance Period on which the New York Stock Exchange is open for trading. Each such Total Stockholder Return shall be computed from data available to the public. At the end of the Performance Period, the 36 Total Stockholder Return figures for each corporation for the Performance Period will be averaged to determine each corporation’s average Total Stockholder Return (“Average TSR”) for the Performance Period. Each corporation’s Average TSR shall be ranked among the Average TSR for each other corporation in the Peer Performance Group on a percentile basis (using the Excel PERCENTRANK function).
(b) Percentage Level of Target Award. Your Total Stockholder Return Performance Factor, expressed as a percentage, will be determined under this Section 3.2(b) (and Section 3.2(c) to the extent interpolation is necessary) based on the Percentile Ranking (as determined under Section 3.2(a)) of the Corporation’s Average TSR for the Performance Period under the following chart:
Band | Percentile Ranking | Total Stockholder Return Performance Factor |
One | 75th - 100th | 200% (Maximum) |
Two | 60th | 150% |
Three | 50th | 100% |
Four | 40th | 50% |
Five | 35th | 25% (Threshold) |
(c) Total Stockholder Return Performance Factor Interpolation. If the Percentile Ranking as determined under Section 3.2(a) puts the Corporation over the listed Percentile Ranking for the applicable Band (other than Band One) in Section 3.2(b), your Total Stockholder Return Performance Factor under Section 3.2(b) shall be interpolated on a linear basis.
If the Corporation’s Average TSR for the three-year Performance Period is negative, the maximum Total Stockholder Return Performance Factor shall not exceed 100%.
Section 4. ROIC Performance Factor and Cash Flow Performance Factor.
4.1 ROIC Performance Factor. The ROIC Performance Factor will be determined by comparing the Corporation’s ROIC for the Performance Period to the ROIC Target and then identifying the ROIC Performance Factor based upon the factor associated with the difference on the following table:
Award Date: February 22, 2018
Page 7
ROIC Band | ROIC Performance Factor |
Target +≥ 160 basis points | 200% (Maximum) |
Target + 120 basis points | 175% |
Target + 80 basis points | 150% |
Target + 40 basis points | 125% |
Target | 100% |
Target – 10 basis points | 75% |
Target – 20 basis points | 50% |
Target – 30 basis points | 25% (Threshold) |
(a)ROIC Definition. For purposes of this Award Agreement, “ROIC” means return on invested capital for the Performance Period calculated as (A) average annual (i) net income (excluding any charge or addition to net income resulting solely from adjustment of deferred tax assets and liabilities for the effect of enactment of corporate tax reform and related legislation and regulations that change the top United States federal corporate income tax rate by two or more percentage points after February 22, 2018 (“Tax Reform”)) plus (ii) interest expense times one minus the average of the highest marginal federal corporate income tax rates over the three-year Performance Period (“Return”), divided by (B) the average thirteen quarter-end investment balances (beginning with the quarter-end immediately preceding the beginning of the Performance Period) consisting of (i) debt (including current maturities of long-term debt) plus (ii) stockholders’ equity plus the postretirement plans amounts determined quarterly as included in the Corporation’s Statement of Stockholders’ Equity. For any year in which net income would otherwise be affected by Tax Reform, net income shall be adjusted by substituting the effective tax rate assumed in the 2018 Long Range Plan for the actual effective tax rate (and ignoring the adjustment under clause (i) above, if any, to the extent necessary to avoid double counting of tax impacts).
(b)ROIC Determination. Each component of ROIC and the calculation of any postretirement plans amounts recorded in the Corporation’s Statement of Stockholders’ Equity shall be determined by the Committee in accordance with generally accepted accounting principles in the United States and be based upon the comparable numbers reported on the Corporation’s audited consolidated financial statements or, if audited financial statements are not available for the date or period on which ROIC is being determined, the Committee shall make its determination in a manner consistent with the historical practices used by the Corporation in determining the components of ROIC and postretirement plans amounts recorded in the Corporation’s Statement of Stockholders’ Equity for purposes of reporting those items on its audited financial statements, as modified by this paragraph. Notwithstanding the foregoing, ROIC will be adjusted to exclude the impact of any change in accounting standards or adoption of any new accounting standards that is required under generally accepted accounting principles in the United States after February 22, 2018, and that is reported in the Corporation’s filings with the Securities and Exchange Commission as having a material effect on the Corporation’s consolidated financial statements. ROIC, as included in the 2018 Long Range Plan, and the change in ROIC for purposes of the ROIC Performance Factor, will be determined in accordance with this Section 4.1(b).
Award Date: February 22, 2018
Page 8
4.2 Cash Flow Performance Factor. The Cash Flow Performance Factor will be determined by comparing the Corporation’s cumulative Cash Flow during the Performance Period to the Cash Flow Target, and then identifying the Cash Flow Performance Factor based upon the factor associated with the change from the Cash Flow Target on the following table:
Cash Flow Band | Cash Flow Performance Factor |
Target + ≥ $2.0B or more | 200% (Maximum) |
Target + $1.5B | 175% |
Target + $1.0B | 150% |
Target + $0.5B | 125% |
Target | 100% |
Target – $0.2B | 75% |
Target - $0.5B | 50% |
Target - $0.7B | 25% (Threshold) |
(a)Cash Flow Definition. For purposes of this Award Agreement, “Cash Flow” means net cash flow from operations, adjusted to exclude the impact of: (i) the aggregate after tax difference between the amount forecasted in the Corporation’s 2018 Long Range Plan to be contributed by the Corporation to the Corporation’s defined benefit pension plans during the Performance Period and the actual amounts contributed by the Corporation during the Performance Period; (ii) any tax payments or tax benefits during the Performance Period associated with the divestiture of business units, other than tax payments or tax benefits that were included in the Corporation’s 2018 Long Range Plan; and (iii) for any year in which Cash Flow would otherwise be affected by Tax Reform, the aggregate difference between the tax payments forecasted in the 2018 Long Range Plan and the actual tax payments (and adjusting the amount under clause (i) above, if any, to the extent necessary to avoid double counting of tax impacts).
(b)Cash Flow Determination. Cash Flow shall be determined by the Committee based upon the comparable numbers reported on the Corporation’s audited consolidated financial statements or, if audited financial statements are not available for the period for which Cash Flow is being determined, the Committee shall determine Cash Flow in a manner consistent with the historical practices used by the Corporation in determining net cash provided by operating activities as reported in its audited consolidated statement of cash flows, in either case as modified by this paragraph. Notwithstanding the foregoing, Cash Flow will be adjusted to exclude the impact of any change in accounting standards or adoption of any new accounting standards that is required under generally accepted accounting principles in the United States after February 22, 2018, and that is reported in the Corporation’s filings with the Securities and Exchange Commission as having a material effect on the Corporation’s consolidated financial statements.
4.3 Interpolation of ROIC and Cash Flow Metrics. If the change in ROIC or Cash Flow falls between two numbers listed in the applicable table in Section 4.1 or 4.2, the appropriate factor will be interpolated on a linear basis. Notwithstanding the foregoing, the ROIC Performance Factor will always be zero if the ROIC for the Performance Period falls short of the ROIC Target by more
Award Date: February 22, 2018
Page 9
than 30 basis points and the Cash Flow Performance Factor will always be zero if the aggregate Cash Flow for the Performance Period falls short of the Cash Flow Target by more than $0.7 billion.
Section 5. Payment of Award.
5.1. Employment Requirement.
(a) General Rule. In order to be eligible to receive payment of your final Award as determined under Section 2.1(d), you must accept this Award Agreement as described in Section 18 and remain employed by the Corporation through the last day of the Vesting Period. Except as provided below or where prohibited by law, if your employment as an Employee terminates during the Vesting Period, you shall forfeit your right to receive all or any part of your Award. If you are on Corporation-approved leave of absence at any point during the Vesting Period, for purposes of this Award Agreement, you will be considered to still be in the employ of the Corporation, unless otherwise provided in an agreement between you and the Corporation.
(b) Exceptions. Notwithstanding Section 5.1(a), if the Committee determines
(i) that your employment as an Employee terminated, as a result of your death, Total Disability or Retirement, or a Divestiture (each as defined in Section 5.1(c)), or
(ii) that the Corporation terminated your employment involuntarily after August 22, 2018, (except that, if you are an employee who has been identified by the Corporation as subject to Divestiture, “after August 22, 2018” does not apply to you) as a result of a layoff, including through a voluntary layoff program that constitutes a window program under Section 409A of the Code,
you shall be eligible to receive a fraction of your Award and the DDEs with respect to such fraction. The numerator of such fraction shall equal the number of days in the Vesting Period before your employment as an Employee terminated, and the denominator shall equal the total number of days in the Vesting Period. The Committee shall have complete and absolute discretion to make the determinations called for under this Section 5.1(b), and all such determinations shall be binding on you and on any person who claims all or any part of your Award on your behalf as well as on the Corporation. If you terminate employment during the Vesting Period but are eligible to receive a portion of your Award as a result of an exception under this Section 5.1(b), payment of such portion of your Award and DDEs shall be in full satisfaction of all rights you have under this Award Agreement.
(c) Special Definitions. For purposes of this Award Agreement:
(i) Your employment as an Employee shall be treated as terminating because of a “Total Disability” on the date you commence receiving a benefit under the Corporation’s long-term disability plan in which you participate, or if you are not enrolled in the Corporation’s long-term disability plan, the date on which long-term disability benefits would commence under the plan under which you would have been covered, had you enrolled, using the standards set forth in that plan;
Award Date: February 22, 2018
Page 10
(ii) Your employment as an Employee shall be treated as terminating as a result of Divestiture if the Corporation divests all or substantially all of a business operation of the Corporation and such divestiture results in the termination of your employment with the Corporation and a transfer of such employment to the other party in the Divestiture. A “Divestiture” shall mean a transaction that results in the transfer of control of the business operation divested to any person, corporation, association, partnership, joint venture, limited liability company or other business entity of which less than 50% of the voting stock or other equity interests are owned or controlled directly or indirectly by the Corporation, by one or more of the Corporation’s Subsidiaries or by any combination thereof; and
(iii) Your employment as an Employee shall be treated as terminating because of “Retirement” if the effective date of your termination of employment is after August 22, 2018, and (1) after you reach age 65, or (2) after you reach age 55 and have (at the time of your termination) completed at least ten years of service with the Corporation. The effective date of your termination is the first of the month following the date you terminate services with the Corporation.
(d) | Resignation or Termination before February 22, 2021. |
(i) Except where prohibited by law, if you resign or your employment otherwise terminates before February 22, 2021, other than on account of death, Total Disability, layoff, Retirement or Divestiture (as described above) or Change in Control (as described below), you will forfeit your right to receive all or any part of your Award on the date of your termination.
(ii) Except where prohibited by law, if your employment terminates before February 22, 2021, by action of the Corporation due to your misconduct, then you will forfeit your right to receive all or any part of your Award on the date of your termination. If your employment terminates due to your misconduct after August 22, 2018, but before February 22, 2021, then you will not be eligible to receive a fraction of your Award pursuant to Section 5.1(b) of the Award Agreement, even if at the time of your termination due to misconduct you have attained (i) age 55 and ten years of service, or (ii) age 65. The business area or Enterprise Operations review committee responsible for determinations of misconduct, or the Committee if you are an Elected Officer, will determine if your employment terminates due to misconduct.
(e) Rules Applicable to Canadian Employees. If you are employed in Canada, for purposes of the Award Agreement, the date of termination of employment will be the last day of actual and active employment. For the avoidance of doubt, except as may be required by applicable minimum standards legislation, no period of notice or payment in lieu of notice that is given or that ought to have been given under any applicable law or contract in respect of such termination of employment that follows or is in respect of a period after your last day of actual and active employment, if any, will be considered as extending your period of employment for the purposes of determining your entitlement under this Agreement.
5.2. Payment Rules.
Award Date: February 22, 2018
Page 11
(a)Vesting. If you are eligible to receive an Award under Section 5.1(a) or a fraction of an Award under Section 5.1(b), your Award shall vest on the last day of the Vesting Period.
(b)Method of Payment. Your Award shall be paid in whole shares of Stock. DDEs on the shares underlying your Award, if any, shall be paid in cash. In the event of your death, your payment will be made to your estate.
(c)Timing of Payment. You shall have the right to receive your Award plus DDEs as soon as administratively practicable following the Vesting Period, but no later than the earlier of the March 15 or 60 days following the date on which the Committee certifies in writing that your Target Award has become an Award for the Performance Period (for taxpayers in Canada or as otherwise required by local country law, no later than December 31st of the year in which your Award is certified).
5.3. Cutback. Any payment called for under Section 5.2 will be reduced to the extent that such payment together with payments attributable to any other Share-Based Awards that are granted during 2018 as Performance-Based Awards exceeds 1,000,000 shares of Stock. Amounts in excess of 1,000,000 shares shall be forfeited. Any DDEs on forfeited shares shall also be forfeited.
Section 6. No Assignment – General Creditor Status.
You shall have no right to assign any interest you might have in all or any part of the Target Award or Award which has been granted to you under this Award Agreement and any attempt to do so shall be null and void and shall have no force or effect whatsoever. Furthermore, all payments called for under this Award Agreement shall be made from the Corporation’s general assets, and your right to payment from the Corporation’s general assets shall be the same as the right of a general and unsecured creditor of the Corporation. Until a share of Stock is delivered to you, you generally will not have the rights and privileges of a stockholder. In particular, you will not have the right to vote your PSUs on any matter put to the stockholders of the Corporation; you may not sell, transfer, assign, pledge, use as collateral or otherwise dispose of or encumber PSUs; and you will not have the right to receive any dividends paid to stockholders or dividend equivalents on the PSUs.
Section 7. Plan.
This Award Agreement shall be subject to all of the terms and conditions set forth in the Plan.
Section 8. Change in Control.
8.1. Change in Control during the Performance Period.
(a)In the event of a consummation of a Change in Control during the Performance Period, your Target Award (and DDEs) will become vested (i) on the effective date of the Change in Control if the PSUs are not assumed, continued, or equivalent restricted securities are not substituted for your PSUs by the Corporation or its successor, or (ii) if the PSUs are assumed, continued or substituted by the Corporation or its successor, on the effective date of your involuntary termination other than for Cause (not including death
Award Date: February 22, 2018
Page 12
or Total Disability) or your voluntary termination with Good Reason, in either case, within the 24-month period following the consummation of the Change in Control; provided that any such termination is also a “separation from service” under Code section 409A.
(b)In the event the PSUs vest in accordance with this Section 8.1 (whether immediately following the Change in Control or following your termination), the shares of Stock or equivalent substituted securities in which you have become vested and DDEs shall be delivered to you within 14 days of the date on which you become vested.
8.2. Change in Control during the Vesting Period.
(a)In the event of a consummation of a Change in Control after the end of the Performance Period but during the Vesting Period, you will vest in your Target Award (and DDEs) (i) on the effective date of the Change in Control if the PSUs are not assumed or continued or equivalent restricted securities are not substituted for your PSUs by the Corporation or its successor, or (ii) on the earlier of the end of the Vesting Period or the effective date of your termination if the PSUs are assumed, continued or substituted for, upon your involuntary termination other than for Cause (not including death or Total Disability) or your voluntary termination with Good Reason, in either case, prior to the end of the Vesting Period.
(b)In the event the PSUs vest in accordance with this Section 8.2 (whether immediately following the Change in Control or following your termination), the shares of Stock or equivalent substituted securities in which you have become vested and DDEs shall be delivered to you within 14 days of the date on which you become vested.
8.3 Special Definitions. For purposes of this Award Agreement:
(a) | “Cause” shall mean either of the following: |
(i)Conviction for an act of fraud, embezzlement, theft or other act constituting a felony (other than traffic-related offenses or as a result of vicarious liability); or
(ii)Willful misconduct that is materially injurious to the Corporation’s financial position, operating results or reputation; provided, however that no act or failure to act shall be considered “willful” unless done, or omitted to be done, by you (a) in bad faith; (b) for the purpose of receiving an actual improper personal benefit in the form of money, property or services; or (c) in circumstances where you had reasonable cause to believe that the act or failure to act was unlawful.
(b)“Good Reason” shall mean, without your express written consent, the occurrence of any one or more of the following after the Change in Control:
(i)A material and substantial reduction in the nature or status of your authority or responsibilities;
(ii)A material reduction in your annualized rate of base salary;
Award Date: February 22, 2018
Page 13
(iii)A material reduction in the aggregate value of your level of participation in any short or long term incentive cash compensation plan, employee benefit or retirement plan or compensation practices, arrangements, or policies;
(iv)A material reduction in the aggregate level of participation in equity-based incentive compensation plans; or
(v)Your principal place of employment is relocated to a location that is greater than 50 miles from your principal place of employment on the date the Change in Control is consummated.
Your continued employment following an event that would constitute a basis for voluntary termination with Good Reason shall not constitute Good Reason if you consent to, or waive your rights with respect to any circumstances constituting Good Reason. In addition, the occurrence of an event described in (i) through (v) shall constitute the basis for voluntary termination for Good Reason only if you provide written notice of your intent to terminate employment within 90 days of the first occurrence of such event and the Corporation has had at least 30 days from the date on which such notice is provided to cure such occurrence. If you do not terminate employment for Good Reason within 180 days after the first occurrence of the applicable grounds, then you will be deemed to have waived your right to terminate for Good Reason with respect to such grounds.
8.4. Special Rule. Notwithstanding Section 8.1 or 8.2, if a payment in accordance with those provisions would result in a nonexempt short-swing transaction under Section 16(b) of the Exchange Act, then the date of distribution to you shall be delayed until the earliest date upon which the distribution either would not result in a nonexempt short-swing transaction or would otherwise not result in liability under Section 16(b) of the Exchange Act.
Section 9. Amendment and Termination.
As provided in Section 9 of the Plan, the Board of Directors may at any time amend, suspend or discontinue the Plan and the Committee may at any time amend this Award Agreement. Notwithstanding the foregoing, no such action by the Board of Directors or the Committee shall amend Sections 1, 2, 3, 4, or 5 in a manner adverse to you or reduce the amount payable hereunder in a material manner without your written consent. For this purpose, a change in the amount payable hereunder that occurs solely by reason of a change in the date or form of payment due to Section 409A of the Code or Section 16 of the Exchange Act shall in no case be treated as a reduction prohibited by this Section 9. Thus, for example, if an amount payable by reason of Section 8 is delayed by an amendment to this Award Agreement or other action undertaken to comply with Section 409A of the Code and the amount payable is reduced solely by reason of a corresponding delay in the date of valuation of a share of Stock, such a change shall not be treated as a reduction prohibited by this Section 9. This Section 9 shall be construed and applied so as to permit the Committee to amend this Award Agreement at any time in any manner reasonably necessary or appropriate in order to comply with the requirements of Section 16 of the Exchange Act and of Section 409A of the Code, including amendments regarding the timing and form of payments hereunder.
Section 10. | Data Privacy Consent For Employees Located Outside Of The United States. |
Award Date: February 22, 2018
Page 14
To the extent recognized under applicable law, you hereby explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your Personal Data (defined below) as described in this Award Agreement by and among the Corporation for the exclusive purpose of implementing, administering and managing your participation in the Plan.
You understand that the Corporation collects, holds, uses and processes certain information about you, including, but not limited to, your name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares or directorships held in the Corporation, details of all awards or any other entitlement to shares awarded, canceled, exercised, vested, unvested or outstanding in your favor, for the purpose of implementing, administering and managing the Plan (“Personal Data”). The Corporation acts as the controller/owner of this Personal Data, and processes this Personal Data for purposes of implementing, administering, and managing the Plan. The Corporation protects the Personal Data that it receives in the United States from the European Union in accordance with the EU-U.S. Privacy Shield. You can obtain further information about Privacy Shield in the Corporation's European Employee Privacy Notice, which can currently be accessed through the Corporation's Cross Function Procedure CRX-017.
You understand that Personal Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in your country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than your country. You may request a list with the names and addresses of any third-party recipients of the Personal Data by contacting your local human resources representative. Where disclosing Personal Data to these third parties, the Corporation provides appropriate safeguards for protecting the transfer of your Personal Data, such as establishing standard data protection clauses with the third parties as adopted by the European Commission. You may request a copy of, or information about, such safeguards by contacting your local human resources representative. You authorize these third-party recipients to receive, possess, use, retain and transfer your Personal Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Personal Data as may be required to a broker or other third party with whom the Corporation may elect to administer the settlement of any award. You understand that Personal Data will be held only as long as is necessary to implement, administer and manage your participation in the Plan and comply with applicable legal requirements.
To the extent provided by your local law, you may, at any time, have the right to request: access to your Personal Data, rectification of your Personal Data, erasure of your Personal Data, restriction of processing of your Personal Data, and portability of your Personal Data. You may also have the right to object, on grounds related to a particular situation, to the processing of your Personal Data, as well as to refuse or withdraw the consents herein, in any case without cost, by contacting in writing your local human resources representative. You understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact your local human resources representative.
Section 11. | No Assurance of Employment; No Right to an Award; Value of Award. |
Nothing contained in the Plan or in this Award Agreement shall confer upon you any right to continue in the employ or other service of the Corporation or constitute any contract (of
Award Date: February 22, 2018
Page 15
employment or otherwise) or limit in any way the right of the Corporation to change your compensation or other benefits or to terminate your employment with or without cause. You acknowledge and agree as follows:
(a)the Plan is discretionary in nature and that the Board of Directors may amend, suspend, or terminate it at any time;
(b)the grant of the PSUs is voluntary and occasional and does not create any contractual or other right to receive future grants of any PSUs, or benefits in lieu of any PSUs even if PSUs have been granted repeatedly in the past;
(c)all determinations with respect to such future PSUs, if any, including but not limited to the times when PSUs shall be granted or when PSUs shall vest, will be at the sole discretion of the Committee;
(d)your participation in the Plan is voluntary;
(e)the value of the PSUs is an extraordinary item of compensation, which is outside the scope of your employment contract (if any), except as may otherwise be explicitly provided in your employment contract;
(f)the PSUs are not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculating termination, severance, resignation, redundancy, end of service, or similar payments, or bonuses, long-service awards, pension or retirement benefits;
(g)the PSUs shall expire upon termination of your employment for any reason except as may otherwise be explicitly provided in the Plan and this Award Agreement;
(h)the future value of the shares is unknown and cannot be predicted with certainty; and
(i)no claim or entitlement to compensation or damages arises from the termination of the PSUs or diminution in value of the PSUs or Stock and you irrevocably release the Corporation from any such claim that may arise.
Section 12. Conflict.
In the event of a conflict between this Award Agreement and the Plan, the Plan document shall control.
Section 13. Compliance with Section 409A of the Code.
It is the intent of the Corporation that your Award not be subject to taxation under Section 409A(a)(1) of the Code. Nevertheless, in the event that your Award is or could be subject to Section 409A of the Code, as determined by the Senior Vice President, Human Resources, in consultation with the General Tax Counsel or his or her delegate, the following rules apply: (i) the Award will be interpreted and administered to meet the requirements of Sections 409A(a)(2), (3) and (4) of the Code and thus to be exempt from taxation under Section 409A(a)(1) of the Code; (ii) no Award
Award Date: February 22, 2018
Page 16
payment will be made on account of your termination of employment unless the termination of employment constitutes a “separation from service” under Code section 409A(a)(2)(a)(i); and (iii) if you are a “specified employee” within the meaning of Code section 409A, any payment in respect of this Award made on account of a termination of employment will be delayed for six (6) months following such termination of employment, and then made at the earliest date permitted by Section 409A of the Code.
Section 14. Post-Employment Covenants & Stock Ownership Requirements.
Except where prohibited by law, by accepting this Award Agreement as described in Section 18, you agree to the terms of the Post-Employment Conduct Agreement contained in Exhibit A to this Award Agreement and you acknowledge receipt of the Stock Ownership Requirements (“Ownership Requirements”) attached as Exhibit B to this Award Agreement and agree to comply with such Ownership Requirements as amended from time to time. If you are not a Vice President (or above) on February 22, 2018, but you are promoted to Vice President (or above) prior to February 22, 2021, the Ownership Requirements as in effect at that time shall become applicable to you on the date of your promotion to Vice President (or above).
Section 15. English Language.
You have received the terms and conditions of this Award Agreement and any other related communications, and you consent to having received these documents, in English. If you have received this Award Agreement or any other documents related to the Plan translated into a language other than English, and if the translated version is different from the English version, the English version will control.
Quebec Residents Only: The Parties have agreed that this Award Agreement, the Plan as well as any notice, document or instrument relating to them be drawn up in English only. You acknowledge that, upon your reasonable request, the Corporation will provide a French translation of such documents to you. Les parties aux présentes ont convenu que la présente accord, le "Plan," ainsi que tous autres avis, actes ou documents s'y rattachant soient rédigés en anglais seulement. Vous reconnaissez que, à votre demande raisonnable, "the Corporation" fournit une traduction française de ces documents à vous.
Section 16. Currency Exchange Risk.
If your functional currency is not the U.S. dollar, you agree and acknowledge that you will bear any and all risk associated with the exchange or fluctuation of currency associated with the Award (the “Currency Exchange Risk”). You waive and release the Corporation and its subsidiaries from any potential claims arising out of the Currency Exchange Risk.
Section 17. Exchange Control Requirements.
You agree and acknowledge that you will comply with any and all exchange control requirements applicable to the Award and any resulting funds including, without limitation, reporting or repatriation requirements.
Section 18. Execution; Acceptance; Electronic Delivery.
Award Date: February 22, 2018
Page 17
By executing this Award Agreement, you consent to receive copies of the Prospectus applicable to this Award from this internet site (http://www.stockplanconnect.com) as well as to electronic delivery of the Corporation’s annual report on Form 10-K, annual proxy statement and quarterly reports on Form 10-Q. This consent can only be withdrawn by written notice to the Vice President of Compensation and Performance Management at the address noted below. The Corporation may, in its sole discretion, decide to deliver any documents related to the Award under the Plan or future Awards that may be awarded under the Plan by electronic means or request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and agree to participate in the Plan through any on-line or electronic system established and maintained by the Corporation or another third party designated by the Corporation.
No Award is enforceable until you properly acknowledge your acceptance by completing the electronic receipt or returning an executed copy of this Award Agreement to the Vice President of Compensation and Performance Management as soon as possible but in no event later than May 31, 2018. Acceptance of this Award Agreement must be made only by you personally or by a person acting pursuant to a power of attorney in the event of your inability to acknowledge your acceptance (and not by your estate, your spouse or any other person) and constitutes your consent to any action taken under the Plan consistent with its terms with respect to this Award. Notwithstanding the foregoing, this Award will be enforceable and deemed accepted, and will not be forfeited, if you are unable to accept this Award Agreement personally by May 31, 2018, due to your death, disability, incapacity, deployment in the Armed Forces, or similar unforeseen circumstance as determined by the Corporation in its discretion. The Committee has authorized electronic means for the delivery and acceptance of this Award Agreement. If you desire to accept this Award, you must acknowledge your acceptance and receipt of this Award Agreement, either electronically or by signing and returning a copy of this letter on or before May 31, 2018, as follows:
• | Electronic Acceptance: Go to http://www.stockplanconnect.com; or |
• | By Mail: Nick Lossia, Vice President of Compensation and Performance Management, Lockheed Martin Corporation, Mail Point 126, 6801 Rockledge Drive, Bethesda, MD 20817. |
Assuming prompt and proper acknowledgment of this Award Agreement as described in Section 18, this Award will be effective as of the Award Date.
Sincerely,
Patricia L. Lewis
Senior Vice President,
Human Resources
(For written acceptance, please complete, sign, and return by mail.)
By accepting this Award Agreement as described in Section 18, employees located outside of the U.S. are consenting to the processing of Personal Data as described in Section 10.
Award Date: February 22, 2018
Page 18
Signed by:
Signature | Date | |
Print Name | Employee ID | |
Award Date: February 22, 2018
Page 19
Appendix A
Capitalized Terms
Average TSR | § 3.2(a) |
Award | 6th ¶ |
Award Date | Header |
Cash Flow | § 4.2(a) |
Cash Flow Performance Factor | § 4.2 |
Cash Flow Target | § 2.1(c) |
Cause | § 8.3(a) |
Change in Control | Plan |
Code | Plan |
Committee | 1st ¶ |
Corporation | 6th ¶ |
DDE | § 1.1(c) |
Divestiture | § 5.1(c)(ii) |
Earned Cash Flow Performance Award | §2.1(c) |
Earned ROIC Performance Award | §2.1(b) |
Earned Total Stockholder Return Performance Award | §2.1(a) |
Employee | Plan |
Exchange Act | Plan |
Fair Market Value | Plan |
Good Reason | § 8.3(b) |
Insider | Plan |
Maximum Award | § 1.1(b) |
Peer Performance Group | § 3.1 |
Performance-Based Award | Plan |
Performance Period | § 1.2 |
Personal Data | § 10 |
Plan | 1st ¶ |
PSU | § 1.1(a) |
Retirement | § 5.1(c)(iii) |
Return | § 4.1(a) |
ROIC | § 4.1(a) |
ROIC Performance Factor | § 4.1 |
ROIC Target | § 2.1(b) |
Share-Based Awards | Plan |
Stock | Plan |
Target Award | 6th ¶§ 1.1(a) |
Target Cash Flow Performance Award | § 1.1(a)(iii) |
Target ROIC Performance Award | § 1.1(a)(ii) |
Target Total Stockholder Return Performance Award | § 1.1(a)(i) |
Total Disability | § 5.1(c)(i) |
Total Stockholder Return | Plan; § 3.2(a) |
Total Stockholder Return Performance Factor | § 3.1; § 3.2 |
Vesting Period | § 1.3 |
Award Date: February 22, 2018
Page 20
Exhibit A
Post-Employment Conduct Agreement
(PSU Grant)
This Post-Employment Conduct Agreement (this “PECA”) attached as Exhibit A to the Award Agreement with an Award Date of February 22, 2018, (the “Award Agreement”) is entered into in consideration of, among other things, the grant of performance restricted stock units to me under the Award Agreement (the “PSUs”) pursuant to the Lockheed Martin Corporation 2011 Incentive Performance Award Plan, as amended (the “Plan”). References to the “Corporation” shall include Lockheed Martin Corporation and its Subsidiaries. By accepting the PSUs, I agree as follows:
1.Restrictions Following Termination of Employment.
(a)Covenant Not To Compete - Without the express written consent of the ”Required Approver” (as defined in Section 6), during the one-year period (or two-year period for Elected Officers) following the date of my termination of employment (the “Termination Date”) with the Corporation, I will not, directly or indirectly, be employed by, provide services to, or advise a “Restricted Company” (as defined in Section 6), whether as an employee, advisor, director, officer, partner or consultant, or in any other position, function or role that, in any such case,
(i) oversees, controls or affects the design, operation, research, manufacture, marketing, sale or distribution of “Competitive Products or Services” (as defined in Section 6) of or by the Restricted Company, or
(ii) would involve a substantial risk that the “Confidential or Proprietary Information” (as defined in Section 1(c)) of the Corporation (including but not limited to technical information or intellectual property, strategic plans, information relating to pricing offered to the Corporation by vendors or suppliers or to prices charged or pricing contemplated to be charged by the Corporation, information relating to employee performance, promotions or identification for promotion, or information relating to the Corporation’s cost base) could be used to the disadvantage of the Corporation.
Section 1(a)(i) and (ii) shall not apply to residents of California.
To the extent permitted by applicable law, including but not limited to any applicable rules governing attorney conduct (such as the ABA Model Rules of Professional Conduct and state versions thereof), Sections 1(a)(i) and (ii) and Section 1(b) relating to non-solicitation, shall apply to individuals who are employed by the Corporation in an attorney position and whose occupation during the one-year (or two-year, for Elected Officers) period following employment with the Corporation does not include practicing law.
In lieu of Section 1(a)(i) and (ii), as well as Section 1(b) relating to non-solicitation, the following Section 1(a)(iii) shall apply to individuals who are employed by the Corporation in an
Award Date: February 22, 2018
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attorney position, and whose occupation during the one-year (or two-year, for Elected Officers) period following employment with the Corporation includes practicing law.
(iii) Post-Employment Activity As a Lawyer – I acknowledge that as counsel to the Corporation, I owe ethical and fiduciary obligations to the Corporation and that at least some of these obligations will continue even after my Termination Date with the Corporation. I agree that after my Termination Date I will comply fully with all applicable ethical and fiduciary obligations that I owe to the Corporation. To the extent permitted by applicable law, including but not limited to any applicable rules governing attorney conduct, I agree that I will not:
(a) | Represent any client in the same or a substantially related matter in which I represented the Corporation where the client’s interests are materially adverse to the Corporation; or |
(b) | Disclose confidential information relating to my representation of the Corporation, including the disclosure of information that is to the disadvantage of the Corporation, except for information that is or becomes generally known. |
The Corporation’s Senior Vice President, General Counsel, and Corporate Secretary or the General Tax Counsel, as applicable, will determine in his or her discretion whether an individual is employed by the Corporation in an attorney position.
(b)Non-Solicit – Without the express written consent of the Required Approver, during the two-year period following the Termination Date, I will not (i) cause or attempt to cause, directly or indirectly, the complete or partial loss of any contract in effect before the Termination Date between the Corporation and any customer, supplier, distributor or manufacturer of or to the Corporation with which I was responsible, in whole or in part, for soliciting, negotiating, implementing, managing, or overseeing or (ii) induce or attempt to induce, directly or indirectly, any person who is an employee of the Corporation with whom I worked or interacted with within two years prior to the Termination Date to cease employment with the Corporation in order to perform work or services for any entity other than the Corporation.
(c)Protection of Proprietary Information – Except to the extent required by law, following my Termination Date, I will have a continuing obligation to comply with the terms of any non-disclosure or similar agreements that I signed while employed by the Corporation committing to hold confidential the “Confidential or Proprietary Information” (as defined below) of the Corporation or any of its affiliates, subsidiaries, related companies, joint ventures, partnerships, customers, suppliers, partners, contractors or agents, in each case in accordance with the terms of such agreements. I will not use or disclose or allow the use or disclosure by others to any person or entity of Confidential or Proprietary Information of the Corporation or others to which I had access or that I was responsible for creating or overseeing during my employment with the Corporation. In the event I become legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand or otherwise) to disclose any proprietary or confidential information, I will immediately notify the Corporation’s Senior Vice President, General Counsel and Corporate Secretary as to the existence of the obligation and will cooperate with any
Award Date: February 22, 2018
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reasonable request by the Corporation for assistance in seeking to protect the information. All materials to which I have had access, or which were furnished or otherwise made available to me in connection with my employment with the Corporation shall be and remain the property of the Corporation. For purposes of this PECA, “Confidential or Proprietary Information” means Proprietary Information within the meaning of CRX-015C (a copy of which has been made available to me), including but not limited to information that a person or entity desires to protect from unauthorized disclosure to third parties that can provide the person or entity with a business, technological, or economic advantage over its competitors, or which, if known or used by third parties or if used by the person’s or entity’s employees or agents in an unauthorized manner, might be detrimental to the person’s or entity’s interests. Confidential or Proprietary Information may include, but is not limited to:
(i) existing and contemplated business, marketing and financial business information such as business plans and methods, marketing information, cost estimates, forecasts, financial data, cost or pricing data, bid and proposal information, customer identification, sources of supply, contemplated product lines, proposed business alliances, and information about customers or competitors, and
(ii) existing and contemplated technical information and documentation pertaining to technology, know how, equipment, machines, devices and systems, computer hardware and software, compositions, formulas, products, processes, methods, designs, specifications, mask works, testing or evaluation procedures, manufacturing processes, production techniques, research and development activities, inventions, discoveries, and improvements, and
(iii) human resources and personnel information.
(d)No Disparagement – Following the Termination Date, I will not make any statements, whether verbal or written, that disparage or reasonably may be interpreted to disparage the Corporation or its directors, officers, employees, technology, products or services with respect to any matter whatsoever.
(e)Cooperation in Litigation and Investigations – Following the Termination Date, I will, to the extent reasonably requested, cooperate with the Corporation in any pending or future litigation (including alternative dispute resolution proceedings) or investigations in which the Corporation or any of its subsidiaries or affiliates is a party or is required or requested to provide testimony and regarding which, as a result of my employment with the Corporation, I reasonably could be expected to have knowledge or information relevant to the litigation or investigation. Notwithstanding any other provision of this PECA, nothing in this PECA shall affect my obligation to cooperate with any governmental inquiry or investigation or to give truthful testimony in court.
2.Consideration and Acknowledgement. I acknowledge and agree that the benefits and compensation opportunities being made available to me under the Award Agreement are in addition to the benefits and compensation opportunities that otherwise are or would be available to me in connection with my employment by the Corporation and that the grant of the PSUs is expressly made contingent upon my agreements with the Corporation set forth in this PECA. I acknowledge that the scope and duration of the restrictions in Section 1 are necessary to be effective and are fair and reasonable in light of the value of the benefits and compensation
Award Date: February 22, 2018
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opportunities being made available to me under the Award Agreement. I further acknowledge and agree that as a result of the high level executive and management positions I hold with the Corporation and the access to and extensive knowledge of the Corporation's Confidential or Proprietary Information, employees, suppliers and customers, these restrictions are reasonably required for the protection of the Corporation's legitimate business interests.
3.Remedies For Breach of Section 1; Additional Remedies of Clawback and Recoupment.
(a) I agree, upon demand by the Corporation, to forfeit, return or repay to the Corporation the “Benefits and Proceeds” (as defined below) in the event any of the following occur:
(i) I breach any of the covenants or agreements in Section 1;
(ii) The Corporation determines that either (a) my intentional misconduct or gross negligence, or (b) my failure to report another person’s intentional misconduct or gross negligence of which I had knowledge during the period I was employed by the Corporation, contributed to the Corporation having to restate all or a portion of its financial statements filed for any period with the Securities and Exchange Commission;
(iii) The Corporation determines that I engaged in fraud, bribery or any other illegal act or that my intentional misconduct or gross negligence (including the failure to report the acts of another person of which I had knowledge during the period I was employed by the Corporation) contributed to another person’s fraud, bribery or other illegal act, which in any such case adversely affected the Corporation’s financial position or reputation; or
(iv) Under such other circumstances specified by final regulation issued by the Securities and Exchange Commission entitling the Corporation to recapture or clawback “Benefits and Proceeds” (as defined below).
(b) The remedy provided in Section 3(a) shall not be the exclusive remedy available to the Corporation for any of the conduct described in Section 3(a) and shall not limit the Corporation from seeking damages or injunctive relief.
(c) For purposes of this Section 3, “Benefits and Proceeds” means (i) to the extent I own Stock issued in respect of vested PSUs, such Stock; (ii) to the extent I no longer own the shares of Stock of the Corporation issued in respect of the PSUs, cash in an amount equal to the greater of (x) the value of such Stock on the date the associated PSUs vested (which, unless otherwise determined by the Management Development and Compensation Committee of the Board of Directors of the Corporation, shall be equal to the closing price of the shares of Common as finally reported by the New York Stock Exchange on such date), and (y) the proceeds received in connection with the disposition of such Stock; and (iii) to the extent I have not earned the PSUs fully, all of my remaining rights, title or interest in my Award and any accrued dividend equivalents with respect thereto.
Award Date: February 22, 2018
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4.Injunctive Relief. I acknowledge that the Corporation’s remedies at law may be inadequate to protect the Corporation against any actual or threatened breach of the provisions of Section 1 or the conduct described in Section 3(a), and, therefore, without prejudice to any other rights and remedies otherwise available to the Corporation at law or in equity (including but not limited to, an action under Section 3(a)), the Corporation shall be entitled to injunctive relief in its favor and to specific performance without proof of actual damages and without the requirement of the posting of any bond or similar security.
5.Invalidity; Unenforceability. It is the desire and intent of the parties that the provisions of this PECA shall be enforced to the fullest extent permissible. Accordingly, if any particular provision of this PECA is adjudicated to be invalid or unenforceable, this PECA shall be deemed amended to delete the portion adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of this provision in the particular jurisdiction in which such adjudication is made.
6.Definitions. Capitalized terms not defined in this PECA have the meaning given to them in the Plan, as applicable. For purposes of this PECA, the following terms have the meanings given below:
(a) “Restricted Company” means The Boeing Company, General Dynamics Corporation, Northrop Grumman Corporation, the Raytheon Company, United Technologies Corporation, Honeywell International Inc., BAE Systems Inc., L-3 Communications Corporation, the Harris Corporation, Thales, Airbus Group, Inc., Textron Inc., Finmeccanica SpA, Leidos Holdings, Inc. and (i) any entity directly or indirectly controlling, controlled by, or under common control with any of the foregoing, and (ii) any successor to all or part of the business of any of the foregoing as a result of a merger, reorganization, consolidation, spin-off, split-up, acquisition, divestiture, or similar transaction.
(b) “Competitive Products or Services” means products or services that compete with, or are an alternative or potential alternative to, products sold or services provided by a subsidiary, business area, division or operating unit or business of the Corporation as of the Termination Date and at any time within the two-year period ending on the Termination Date; provided, that, (i) if I had direct responsibility for the business of, or function with respect to, a subsidiary, or for a business area, division or operating unit or business of the Corporation at any time within the two-year period ending on the Termination Date, Competitive Products or Services includes the products so sold or the services so provided during that two-year period by the subsidiary, business area, division or operating unit of the Corporation for which I had responsibility, and (ii) if I did not have direct responsibility for the business of, or function with respect to, a subsidiary, or for a business area, division or operating unit or business of the Corporation at any time within the two-year period ending on the Termination Date, Competitive Products or Services includes the products so sold or the services so provided by a subsidiary, business area, division or operating unit of the Corporation for which I had access (or was required or permitted such access in the performance of my duties or responsibilities with the Corporation) to Confidential or Proprietary Information of the Corporation at any time during the two-year period ending on the Termination Date.
(c) “Required Approver” means:
Award Date: February 22, 2018
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(i) with respect to the Chairman, President and Chief Executive Officer, the Management and Development Committee of the Corporation’s Board of Directors;
(ii) with respect to an Elected Officer, the Corporation’s Chairman, President and Chief Executive Officer; or
(iii) with respect to all other employees, the Senior Vice President, Human Resources of the Corporation.
(d) “Elected Officer” means an officer of the Corporation who was elected to his or her position by the Corporation’s Board of Directors.
7.Miscellaneous.
(a) The Plan, the Award Agreement (with Exhibit B) and this PECA constitute the entire agreement governing the terms of the award of the PSUs to me.
(b) This PECA shall be governed by Maryland law, without regard to its provisions governing conflicts of law. Any enforcement of, or challenge to, this PECA may only be brought in the United States District Court for the District of Maryland, unless such court determines that it does not have subject matter jurisdiction, in which case any such enforcement or challenge may be brought in the Circuit Court of Maryland. Both parties consent to the proper jurisdiction and venue of such court, as applicable, for the purpose of enforcing or challenging this PECA.
(c) This PECA shall inure to the benefit of the Corporation’s successors and assigns and may be assigned by the Corporation without my consent.
(d) This PECA provides for certain obligations on my part following the Termination Date and shall not, by implication or otherwise, affect in any way my obligations to the Corporation during the term of my employment by the Corporation, whether pursuant to written agreements between the Corporation and me, the provisions of applicable Corporate policies that may be adopted from time to time or applicable law or regulation.
This PECA is effective as of the acceptance by me of the award of PSU under the Award Agreement and is not contingent on the vesting of my PSU Award.
Award Date: February 22, 2018
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Exhibit B
Stock Ownership Requirements
Lockheed Martin’s Stock Ownership Requirements for Key Employees apply to all senior level positions of Vice President and above. This reflects the expectations of our major stockholders that management demonstrate its confidence in Lockheed Martin through a reasonable level of personal share ownership. This practice is consistent with other major U.S. corporations which link some portion of personal financial interests of key employees with those of shareholders.
Stock Ownership Requirements
Title | Annual Base Pay Multiple |
Chairman, President and Chief Executive Officer | 6 times |
Chief Operating Officer | 5 times |
Chief Financial Officer | 4 times |
Executive Vice Presidents | 3 times |
Senior Vice Presidents | 2 times |
Other Elected Officers | 2 times |
Other Vice Presidents | 1 times |
Satisfaction of Requirements
Covered employees may satisfy their ownership requirements with common stock in these categories:
• | Shares owned directly. |
• | Shares owned by a spouse or a trust. |
• | Shares represented by monies invested in 401(k) Company Common Stock Funds or comparable plans. |
• | Share equivalents as represented by income deferred to the Company Stock Investment Option of the Deferred Management Incentive Compensation Plan (DMICP). |
• | Unvested Restricted Stock Units |
Key employees will be required to achieve the appropriate ownership level within five years and are expected to make continuous progress toward their target. Appointment to a new level will reset the five year requirement. Unexercised options prior to vesting are not counted toward meeting the guidelines.
Holding Period
Covered employees must retain net vested Restricted Stock Units and Performance Stock Units and the net shares resulting from any exercise of stock options if the ownership requirements are not yet satisfied.
Covered employees are asked to report annually on their progress toward attainment of their share ownership goals.
Exhibit 10.3
Long-Term Incentive Performance (Annual)
Award Date: February 22, 2018
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING
SECURITIES THAT HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
Re: | Lockheed Martin Corporation 2011 Incentive Performance Award Plan: |
Long-Term Incentive Performance Award (2018-2020 Performance Period)
Dear Awardee:
On behalf of the Management Development and Compensation Committee (the “Committee”) of the Board of Directors of Lockheed Martin Corporation, I am pleased to tell you that you have been granted a Long-Term Incentive Performance (“LTIP”) Award under the Corporation’s 2011 Incentive Performance Award Plan, as amended (the “Plan”). The purpose of this letter is to serve as the LTIP Award Agreement and to set forth your Target Award as well as the terms and conditions to the payment of your Award. Additional terms and conditions are set forth in the Plan and in the Prospectus relating to the Plan of which the Plan document and this Award Agreement are a part. Your Target Award and the Prospectus are available at http://www.stockplanconnect.com. You should retain the Prospectus and the attached copy of the Plan in your records.
Except as described in Section 18, your Award is not effective or enforceable until you properly acknowledge your acceptance of the Award by completing the electronic receipt or returning an executed copy of this Award Agreement to the Vice President of Compensation and Performance Management as instructed below as soon as possible but in no event later than May 31, 2018. Except as described in Section 18, if you do not properly acknowledge your acceptance of this Award Agreement on or before May 31, 2018, this Award will be forfeited.
Assuming prompt and proper acknowledgment of your acceptance of this Award Agreement as described above and in Section 18, this Award will be effective as of the Award Date. Acceptance of this Award Agreement constitutes your consent to any action taken under the Plan consistent with its terms with respect to this Award and your agreement to be bound by the restrictions contained in Section 18 and Exhibit A (“Post-Employment Conduct Agreement”) and Exhibit B (“Stock Ownership Requirements”), as amended from time to time, except where prohibited by law.
The Corporation will comply with all applicable U.S. Tax withholding requirements applicable to the Award. Please see the prospectus for the Plan for a discussion of certain material U.S. Tax consequences of the Award. If you are a taxpayer in a country other than the U.S., you agree to make appropriate arrangements with the Corporation or its subsidiaries for the satisfaction of all income and employment tax withholding requirements, as well as social insurance contributions applicable to the Award. Please see the tax summary for your country at http://
Award Date: February 22, 2018
Page 2
www.stockplanconnect.com. If you are a taxpayer in a country other than the U.S., you represent that you will consult with your own tax advisors in connection with this Award and that you are not relying on the Corporation for any tax advice.
In general, the Corporation will reduce the amount paid to you under this Award Agreement by an amount sufficient to satisfy any applicable Tax withholding obligation, generally at the highest individual tax rate, unless you elect otherwise in accordance with procedures established by the Corporation during an election window that may be offered by the Corporation. If you elect a lower tax rate for withholding, then you may owe additional taxes as a result of the payment of the Award. The Corporation shall also have the right to (i) offset any other obligation of the Corporation to you (including but not limited to withholding from your salary) by an amount sufficient to satisfy the Tax withholding obligation, or (ii) require you (or your estate) to pay the Corporation an amount equal to the Tax withholding obligation.
Nothing contained in this Award Agreement shall confer upon you any right of continued employment by the Corporation or guarantee that any future awards will be made to you under the Plan. In addition, nothing in this Award Agreement limits in any way the right of the Corporation to terminate your employment at any time. The value of the Award will not be taken into account for other benefits offered by the Corporation, including but not limited to pension benefits.
Capitalized terms used in this Award Agreement either shall be defined in this Award Agreement or if not defined in this Award Agreement shall have the meaning given to the term in the Plan. The term “Target Award” as used in this Award Agreement refers only to the Target Award awarded to you under this Award Agreement and the term “Award” refers only to the LTIP Award set forth in this Award Agreement. References to the “Corporation” include Lockheed Martin Corporation and its Subsidiaries. Appendix A contains an index of all capitalized terms used in this Award Agreement.
Section 1. Target Award; Performance Period.
1.1 Target Award. Your Target Award for the Performance Period under this Award Agreement shall be the U.S. dollar amount identified as your Target Award in your account at http://www.stockplanconnect.com.
1.2 Performance Period. The Performance Period under this Award Agreement is a three-year performance period that runs from January 1, 2018, until December 31, 2020.
1.3 Payment of Award. The amount payable to you under your Award is dependent upon the Corporation’s performance as compared to the metrics described in Section 3 and Section 4 of this Award Agreement and your continued employment with the Corporation in accordance with Section 5 of this Award Agreement. As a result of these requirements, any payments you receive may be larger or smaller than your Target Award (e.g., the performance factors could result in no payment in respect of your Award). With respect to US-based Employees, when an Award becomes vested in accordance with Section 5.2(a), the Award amount will be paid to the Participant in US Dollars. With respect to non-US based employees, when an Award becomes vested in accordance with Section 5.2(a), the amount payable to the Participant in cash will be the amount of the Participant’s Award converted into the Participant’s functional currency at the conversion rate determined by the Corporation in its discretion as of the date the Award becomes vested in accordance with Section 5.2(a).
Award Date: February 22, 2018
Page 3
Section 2. Calculation of Award Payments.
2.1 End of Performance Period Calculation. Following the end of the Performance Period and prior to any payments being made,
(a) The Committee will calculate the Total Stockholder Return Performance Factor based on the Corporation’s performance during the Performance Period relative to the performance of other corporations which compose the “Peer Performance Group” as defined in Section 3.1 below.
(b) The Committee will calculate the ROIC Performance Factor based on the Corporation’s ROIC during the Performance Period as compared to the projected ROIC for the Performance Period as set forth in the February 21, 2018, Committee resolution (“ROIC Target”).
(c) The Committee will calculate the Cash Flow Performance Factor based on the Corporation’s cumulative Cash Flow during the Performance Period as compared to the projected cumulative Cash Flow for the Performance Period as set forth in the February 21, 2018, Committee resolution (“Cash Flow Target”).
(d) Your “Potential Award” shall be calculated by multiplying the weighted average of the Total Stockholder Return Performance Factor, the ROIC Performance Factor, and the Cash Flow Performance Factor by your Target Award. The Total Stockholder Return Performance Factor, the ROIC Performance Factor, and the Cash Flow Performance Factor shall be weighted as follows in determining the weighted average of the three performance factors:
Total Stockholder Return Performance Factor 50%
ROIC Performance Factor 25%
Cash Flow Performance Factor 25%
You must (except as specified in Section 5) remain employed by the Corporation through December 31, 2020, to receive your Potential Award.
2.2 Adjustment of ROIC Target and Cash Flow Target. The Committee will adjust the ROIC Target and Cash Flow Target established as described in Section 2.1(b) and Section 2.1(c), respectively, to account for the impact of an acquisition or divestiture with a transaction value in excess of $1 billion at the time the transaction takes effect.
Section 3. Total Stockholder Return Performance Factor.
3.1. Peer Performance Group. The Total Stockholder Return Performance Factor will be based upon the relative ranking of the Corporation’s Average TSR (as defined in Section 3.2(a)) for the Performance Period to the Average TSR for such Period for each corporation in the “Peer Performance Group.” The “Peer Performance Group” shall consist of the corporations which compose the Standard and Poor’s Aerospace and Defense Index reported under symbol S5AERO by Bloomberg L.P. on January 3, 2018, as follows: Arconic Inc. (ARNC), The Boeing Company (BA), L3 Technologies, Inc. (LLL), Raytheon Company (RTN), United Technologies Corporation
Award Date: February 22, 2018
Page 4
(UTX), Textron Inc. (TXT), Rockwell Collins, Inc. (COL), TransDigm Group Inc. (TDG), General Dynamics Corporation (GD), Northrop Grumman Corporation (NOC), Harris Corporation (HRS), and Huntington Ingalls Industries (HII). If a company in the Peer Performance Group ceases to be publicly-traded during the Performance Period, then that company will be removed from the Peer Performance Group as of the beginning of the Performance Period.
The Corporation’s Total Stockholder Return will be based on the performance of the Stock. With respect to the corporations that make up the Peer Performance Group, the Total Stockholder Return of each corporation that is taken into account in computing the Peer Performance Group Total Stockholder Return will be based on the equity security of the relevant corporation that is used in computing the Standard and Poor’s Aerospace and Defense Index.
3.2. Calculation of Total Stockholder Return Performance Factor.
(a) Calculation of Average TSR. During the Performance Period, the Committee shall compute the Total Stockholder Return (as defined in the Plan and assuming the reinvestment of any cash dividends) for the Corporation and for each other corporation in the Peer Performance Group for thirty-six (36) periods during the Performance Period where each period begins on January 1, 2018, (based on the closing price for the stock on December 31, 2017) and ends on the last day of each successive calendar month in the Performance Period on which the New York Stock Exchange is open for trading. Each such Total Stockholder Return shall be computed from data available to the public. At the end of the Performance Period, the thirty-six (36) Total Stockholder Return figures for each corporation for the Performance Period will be averaged to determine each corporation’s average Total Stockholder Return (“Average TSR”) for the Performance Period. Each corporation’s Average TSR shall be ranked among the Average TSR for each other corporation in the Peer Performance Group on a percentile basis (using the Excel PERCENTRANK function).
(b) Percentage Level of Target Award. Your Total Stockholder Return Performance Factor, expressed as a percentage, will be determined under this Section 3.2(b) (and Section 3.2(c) to the extent interpolation is necessary) based on the Percentile Ranking (as determined under Section 3.2(a)) of the Corporation’s Average TSR for the Performance Period under the following chart:
Band | Percentile Ranking | Total Stockholder Return Performance Factor |
One | 75th – 100th | 200% (Maximum) |
Two | 60th | 150% |
Three | 50th | 100% |
Four | 40th | 50% |
Five | 35th | 25% (Threshold) |
(c) Total Stockholder Return Performance Factor Interpolation. If the Percentile Ranking as determined under Section 3.2(a) puts the Corporation over the listed Percentile Ranking for the applicable Band (other than Band One) in Section 3.2(b), your Total
Award Date: February 22, 2018
Page 5
Stockholder Return Performance Factor under Section 3.2(b) shall be interpolated on a linear basis.
If the Corporation’s Average TSR for the three-year Performance Period is negative, the maximum Total Stockholder Return Performance Factor shall not exceed 100%.
Section 4. ROIC Performance Factor and Cash Flow Performance Factor.
4.1 ROIC Performance Factor. The ROIC Performance Factor will be determined by comparing the Corporation’s ROIC for the Performance Period to the ROIC Target and then identifying the ROIC Performance Factor based upon the factor associated with the difference on the following table:
ROIC Band | ROIC Performance Factor |
Target +≥ 160 basis points | 200% (Maximum) |
Target + 120 basis points | 175% |
Target + 80 basis points | 150% |
Target + 40 basis points | 125% |
Target | 100% |
Target – 10 basis points | 75% |
Target – 20 basis points | 50% |
Target – 30 basis points | 25% (Threshold) |
(a)ROIC Definition. For purposes of this Award Agreement, “ROIC” means return on invested capital for the Performance Period calculated as (A) average annual (i) net income (excluding any charge or addition to net income resulting solely from adjustment of deferred tax assets and liabilities for the effect of enactment of corporate tax reform and related legislation and regulations that change the top United States federal corporate income tax rate by two or more percentage points after February 22, 2018 (“Tax Reform”)) plus (ii) interest expense times one minus the average of the highest marginal federal corporate income tax rates over the three year Performance Period (“Return”), divided by (B) the average thirteen quarter-end investment balances (beginning with the quarter-end immediately preceding the beginning of the Performance Period) consisting of (i) debt (including current maturities of long-term debt) plus (ii) stockholders’ equity plus the postretirement plans amounts determined quarterly as included in the Corporation’s Statement of Stockholders’ Equity. For any year in which net income would otherwise be affected by Tax Reform, net income shall be adjusted by substituting the effective tax rate assumed in the 2018 Long Range Plan for the actual effective tax rate (and ignoring the adjustment under clause (i) above, if any, to the extent necessary to avoid double counting of tax impacts).
(b)ROIC Determination. Each component of ROIC and the calculation of any postretirement plans amounts recorded in the Corporation’s Statement of Stockholders’ Equity shall be determined by the Committee in accordance with generally accepted accounting principles in the United States and be based upon the comparable numbers reported on the Corporation’s audited consolidated financial statements or, if audited
Award Date: February 22, 2018
Page 6
financial statements are not available for the date or period on which ROIC is being determined, the Committee shall make its determination in a manner consistent with the historical practices used by the Corporation in determining the components of ROIC and postretirement plans amounts recorded in the Corporation’s Statement of Stockholders’ Equity for purposes of reporting those items on its audited financial statements, as modified by this paragraph. Notwithstanding the foregoing, ROIC will be adjusted to exclude the impact of any change in accounting standards or adoption of any new accounting standards that is required under generally accepted accounting principles in the United States after February 22, 2018, and that is reported in the Corporation’s filings with the Securities and Exchange Commission as having a material effect on the Corporation’s consolidated financial statements. ROIC, as included in the 2018 Long Range Plan, and the change in ROIC for purposes of the ROIC Performance Factor, will be determined in accordance with this Section 4.1(b).
4.2 Cash Flow Performance Factor. The Cash Flow Performance Factor will be determined by comparing the Corporation’s cumulative Cash Flow during the Performance Period to the Cash Flow Target, and then identifying the Cash Flow Performance Factor based upon the factor associated with the change from the Cash Flow Target on the following table:
Cash Flow Band | Cash Flow Performance Factor |
Target + ≥$2.0B or more | 200% (Maximum) |
Target + $1.5B | 175% |
Target + $1.0B | 150% |
Target + $0.5B | 125% |
Target | 100% |
Target – $0.2B | 75% |
Target - $0.5B | 50% |
Target - $0.7B | 25% (Threshold) |
(a)Cash Flow Definition. For purposes of this Award Agreement, Cash Flow means net cash flow from operations, adjusted to exclude the impact of: (i) the aggregate after tax difference between the amount forecasted in the Corporation’s 2018 Long Range Plan to be contributed by the Corporation to the Corporation’s defined benefit pension plans during the Performance Period and the actual amounts contributed by the Corporation during the Performance Period; (ii) any tax payments or tax benefits during the Performance Period associated with the divestiture of business units, other than tax payments or tax benefits that were included in the Corporation’s 2018 Long Range Plan; and (iii) for any year in which Cash Flow would otherwise be affected by Tax Reform, the aggregate difference between the tax payments forecasted in the 2018 Long Range Plan and the actual tax payments (and adjusting the amount under clause (i) above, if any, to the extent necessary to avoid double counting of tax impacts).
(b)Cash Flow Determination. Cash Flow shall be determined by the Committee based upon the comparable numbers reported on the Corporation’s audited consolidated financial statements or, if audited financial statements are not available for the period for which Cash Flow is being determined, the Committee shall determine Cash Flow in a manner consistent
Award Date: February 22, 2018
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with the historical practices used by the Corporation in determining net cash provided by operating activities as reported in its audited consolidated statement of cash flows, in either case as modified by this paragraph. Notwithstanding the foregoing, Cash Flow will be adjusted to exclude the impact of any change in accounting standards or adoption of any new accounting standards that is required under generally accepted accounting principles in the United States after February 22, 2018, and that is reported in the Corporation’s filings with the Securities and Exchange Commission as having a material effect on the Corporation’s consolidated financial statements.
4.3 Interpolation of ROIC and Cash Flow Metrics. If the change in ROIC or Cash Flow falls between two numbers listed in the applicable table in Section 4.1 or 4.2, the appropriate factor will be interpolated on a linear basis. Notwithstanding the foregoing, the ROIC Performance Factor will always be zero if the ROIC for the Performance Period falls short of the ROIC Target by more than 30 basis points and the Cash Flow Performance Factor will always be zero if the aggregate Cash Flow for the Performance Period falls short of the Cash Flow Target by more than $0.7 billion.
Section 5. Payment of Award.
5.1. Employment Requirement.
(a) General Rule. In order to be eligible to receive payment of your Award as determined under Section 2.1, you must accept this Award Agreement as described in Section 18 and remain employed by the Corporation through the last day of the Performance Period. Except as provided below or where prohibited by law, if your employment as an Employee terminates during the Performance Period, you shall forfeit your right to receive all or any part of your Award. If you are on Corporation-approved leave of absence at any point during the Performance Period, for purposes of this Award Agreement, you will be considered to still be in the employ of the Corporation, unless otherwise provided in an agreement between you and the Corporation.
(b) Exceptions. Notwithstanding Section 5.1(a), if the Committee determines
(1) that your employment as an Employee terminated as a result of your death, Total Disability or Retirement, or a Divestiture (each as defined in Section 5.1(c)), or
(2) that the Corporation terminated your employment involuntarily after August 22, 2018, (except that, if you are an employee who has been identified by the Corporation as subject to Divestiture, “after August 22, 2018,” does not apply to you) as a result of a layoff, including through a voluntary layoff program that constitutes a window program under Section 409A of the Code,
you shall be eligible to receive a fraction of your Award. The numerator of such fraction shall equal the number of days in the Performance Period before your employment as an Employee terminated, and the denominator shall equal the total number of days in the Performance Period. The Committee shall have complete and absolute discretion to make the determinations called for under this Section 5.1(b), and all such determinations shall be binding on you and on any person who claims all or any part of your Award on your behalf as well as on the Corporation. If you terminate employment during the Performance
Award Date: February 22, 2018
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Period but are eligible to receive a portion of your Potential Award as a result of an exception under this Section 5.1(b), payment of such portion of your Potential Award shall be in full satisfaction of all rights you have under this Award Agreement.
(c) Special Definitions. For purposes of this Award Agreement:
(1) Your employment as an Employee shall be treated as terminating because of a “Total Disability” on the date you commence receiving a benefit under the Corporation’s long-term disability plan in which you participate, or if you are not enrolled in the Corporation’s long-term disability plan, the date on which long-term disability benefits would commence under the plan under which you would have been covered, had you enrolled, using the standards set forth in that plan;
(2) Your employment as an Employee shall be treated as terminating as a result of Divestiture if the Corporation divests all or substantially all of a business operation of the Corporation and such divestiture results in the termination of your employment with the Corporation and a transfer of such employment to the other party in the Divestiture. A “Divestiture” shall mean a transaction that results in the transfer of control of the business operation divested to any person, corporation, association, partnership, joint venture, limited liability company or other business entity of which less than 50% of the voting stock or other equity interests are directly or indirectly owned or controlled by the Corporation, by one or more of the Corporation’s Subsidiaries or by a combination thereof; and
(3) Your employment as an Employee shall be treated as terminating because of “Retirement” if the effective date of your termination of employment is after August 22, 2018, and (i) after you reach age 65, or (ii) after you reach age 55 and have (at the time of your termination) completed at least ten years of service with the Corporation. The effective date of your termination is the first day of the month following the date you terminate services with the Corporation.
(d) Resignation or Termination before the Last Day of the Performance Period.
(1) Except where prohibited by law, if you resign or your employment otherwise terminates before the last day of the Performance Period, other than on account of death, Total Disability, layoff, Retirement or Divestiture (as described above) or Change in Control (as described below), you will forfeit your right to receive all or any part of your Award on the date of your termination.
(2) Except where prohibited by law, if your employment terminates before the last day of the Performance Period by action of the Corporation due to your misconduct, then you will forfeit your right to receive all or any part of your Award on the date of your termination. If your employment terminates due to your misconduct after August 22, 2018, but before the last day of the Performance Period, then you will not be eligible to receive a fraction of your Award pursuant to Section 5.1(b) of the Award Agreement, even if at the time of your termination due to misconduct you have attained (i) age 55 and ten years of service, or (ii) age 65. The business area or Enterprise Operations review committee responsible for
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determinations of misconduct, or the Committee if you are an Elected Officer, will determine if your employment terminates due to misconduct.
5.2. Payment Rules.
(a) General Rule: Vesting; Method of Payment; Timing of Payment. If you are eligible to receive all, or a portion of, your Potential Award under Section 5.1, up to $10,000,000 of your Potential Award shall be fully vested on the date on which the Committee certifies in writing that your Target Award has become a Potential Award for the Performance Period. This portion of your award shall be known as the “Payable Portion” of your Potential Award. The Payable Portion of your Potential Award shall be (i) paid to you in cash as soon as administratively practicable after the certification date described above, but not later than March 15, 2021, or (ii) deferred in accordance with Section 5.2(c). Subject to your deferral election under Section 5.2(c), in the event of your death, the Payable Portion of your Potential Award will be made to your estate.
(b) Special Rules for Certain Employees Terminated During Performance Period. If you terminate employment during the Performance Period but are eligible to receive a portion of your Potential Award as a result of an exception under Section 5.1(b), payment of such portion of your Potential Award shall be in full satisfaction of all rights you have under this Award Agreement. The portion of your Potential Award payable to you following a termination of employment during the Performance Period under circumstances described in Section 5.1(b) shall be paid to you or, in the event of your death, to your estate, at the time specified in Section 5.2(a) (subject to Section 5.2(c)).
(c) Deferral. You will be given an opportunity to elect to defer any amounts payable under Section 5.2 of this Award Agreement. Such election shall be irrevocable, shall be made in accordance with the terms of the Lockheed Martin Corporation Deferred Management Incentive Compensation Plan (“DMICP”) and the requirements of Code Section 409A, and shall be subject to such additional terms and conditions as are set by the Committee. A deferral election form and the terms and conditions for any deferral will be furnished to you in due course. The beneficiary designation for the DMICP shall govern any amounts deferred under the terms of the DMICP. This Section 5.2(c) shall not apply if you are a taxpayer in a country other than the United States.
(d) Payment Rules Applicable to Canadian Employees. If you are employed in Canada, for purposes of the Award Agreement, the date of termination of employment will be the last day of actual and active employment. For the avoidance of doubt, except as may be required by applicable minimum standards legislation, no period of notice or payment in lieu of notice that is given or that ought to have been given under any applicable law or contract in respect of such termination of employment that follows or is in respect of a period after your last day of actual and active employment, if any, will be considered as extending your period of employment for the purposes of determining your entitlement under this Agreement.
5.3. Cutback. Any portion of your Potential Award in excess of the Payable Portion of your Potential Award will be forfeited to the extent that such portion, together with payments attributable to any other Cash-Based Awards that are granted during 2018 as Performance Based Awards, exceeds $10,000,000. Amounts in excess of any Plan limits also shall be forfeited.
Award Date: February 22, 2018
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5.4. Means of Satisfying Code Section 409A. If any payment that would otherwise be made under this Award Agreement is required to be delayed by reason of Section 13, such payment shall be made at the earliest date permitted by Code Section 409A. The amount of any delayed payment shall be the amount that would have been paid prior to the delay, adjusted to include interest from the original payment date to the actual payment date, at a rate equivalent to the six month London Interbank Offered Rate (LIBOR) as published in the Money Rates section of the Wall Street Journal, plus 25 basis points. The increase over LIBOR may be adjusted to reflect the six month unsecured borrowing rate of the Corporation.
Section 6. No Assignment – General Creditor Status.
You shall have no right to assign any interest you might have in all or any part of the Target Award or Potential Award which has been granted to you under this Award Agreement and any attempt to do so shall be null and void and shall have no force or effect whatsoever. Furthermore, all payments called for under this Award Agreement shall be made in cash from the Corporation’s general assets, and your right to payment from the Corporation’s general assets shall be the same as the right of a general and unsecured creditor of the Corporation.
Section 7. Plan.
This Award Agreement shall be subject to all of the terms and conditions set forth in the Plan.
Section 8. Change in Control.
8.1. Vesting of Award Upon Change in Control. In the event of a consummation of a Change in Control during the Performance Period, your Target Award will become vested (i) on the effective date of the Change in Control if the LTIP Award is not assumed or continued, or equivalent cash incentives are not substituted for your LTIP Award by the Corporation or its successor, or (ii) if the LTIP is assumed, continued or substituted, upon your involuntary termination other than for Cause (not including death or Total Disability) or your voluntary termination with Good Reason, in either case, within the 24-month period following the consummation of the Change in Control. The cash payment in which you have become vested shall be delivered to you within fourteen (14) days of the date on which you become vested.
8.2 Special Definitions.
(a)Cause shall mean either of the following:
1)Conviction for an act of fraud, embezzlement, theft or other act constituting a felony (other than traffic-related offenses or as a result of vicarious liability);
2)Willful misconduct that is materially injurious to the Corporation’s financial position, operating results or reputation; provided, however that no act or failure to act shall be considered “willful” unless done, or omitted to be done, by you (a) in bad faith; (b) for the purpose of receiving an actual improper personal benefit in the
Award Date: February 22, 2018
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form of money, property or services; or (c) in circumstances where you had reasonable cause to believe that the act, failure to act, or omission was unlawful.
(b)Good Reason shall mean, without your express written consent, the occurrence of any one or more of the following after the Change in Control:
1)A material and substantial reduction in the nature or status of your authority or responsibilities;
2)A material reduction in your annualized rate of base salary;
3)A material reduction in the aggregate value of your level of participation in any short or long term incentive cash compensation plan, employee benefit or retirement plan or compensation practices, arrangements, or policies;
4)A material reduction in the aggregate level of participation in equity-based incentive compensation plans; or
5)Your principal place of employment is relocated to a location that is greater than fifty (50) miles from your principal place of employment on the date the Change in Control is consummated.
Your continued employment following an event that would constitute a basis for voluntary termination with Good Reason shall not constitute Good Reason if you consent to, or waive your rights with respect to, any circumstances constituting Good Reason. In addition, the occurrence of an event described in 1) through 5) shall constitute the basis for voluntary termination for Good Reason only if you provide written notice of your intent to terminate employment within 90 days of the first occurrence of such event and the Corporation has had at least 30 days from the date on which such notice is provided to cure such occurrence. If you do not terminate employment for Good Reason within 180 days after the first occurrence of the applicable grounds, then you will be deemed to have waived your right to terminate for Good Reason with respect to such grounds.
8.3. Special Rule. Notwithstanding Section 8.1, if a payment in accordance with those provisions would result in a nonexempt short-swing transaction under Section 16(b) of the Exchange Act, then the date of distribution to you shall be delayed until the earliest date upon which the distribution either would not result in a nonexempt short-swing transaction or would otherwise not result in liability under Section 16(b) of the Exchange Act.
Section 9. Amendment and Termination.
As provided in Section 9 of the Plan, the Board of Directors may at any time amend, suspend or discontinue the Plan and the Committee may at any time amend this Award Agreement. Notwithstanding the foregoing, no such action by the Board of Directors or the Committee shall amend Sections 1, 2, 3, 4, or 5 in a manner adverse to you or reduce the amount payable hereunder in a material manner without your written consent. For this purpose, a change in the amount payable hereunder that occurs solely by reason of a change in the date or form of payment due to Section 409A of the Code or Section 16 of the Exchange Act shall in no case be treated as a reduction prohibited by this Section 9. Thus, for example, if an amount payable by reason of Section 8 is delayed by an amendment to this Award Agreement or other action undertaken to
Award Date: February 22, 2018
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comply with Section 409A of the Code and the amount payable is reduced solely by reason of a corresponding delay in the date of valuation of a share of Stock, such a change shall not be treated as a reduction prohibited by this Section 9. This Section 9 shall be construed and applied so as to permit the Committee to amend this Award Agreement at any time in any manner reasonably necessary or appropriate in order to comply with the requirements of Section 16 of the Exchange Act and of Section 409A of the Code, including amendments regarding the timing and form of payments hereunder.
Section 10. | Data Privacy Consent For Employees Located Outside Of The United States. |
To the extent recognized under applicable law, you hereby explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your Personal Data (defined below) as described in this Award Agreement by and among the Corporation for the exclusive purpose of implementing, administering and managing your participation in the Plan.
You understand that the Corporation collects, holds, uses, and processes certain information about you, including, but not limited to, your name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares or directorships held in the Corporation, details of all awards or any other entitlement to shares awarded, canceled, exercised, vested, unvested or outstanding in your favor, for the purpose of implementing, administering and managing the Plan (“Personal Data”). The Corporation acts as the controller/owner of this Personal Data, and processes this Personal Data for purposes of implementing, administering, and managing the Plan. The Corporation protects the Personal Data that it receives in the United States from the European Union in accordance with the EU-U.S. Privacy Shield. You can obtain further information about Privacy Shield in the Corporation's European Employee Privacy Notice, which can currently be accessed through the Corporation's Cross Function Procedure CRX-017.
You understand that Personal Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in your country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than your country. You may request a list with the names and addresses of any third-party recipients of the Personal Data by contacting your local human resources representative. Where disclosing Personal Data to these third parties, the Corporation provides appropriate safeguards for protecting the transfer of your Personal Data, such as establishing standard data protection clauses with the third parties as adopted by the European Commission. You may request a copy of, or information about, such safeguards by contacting your local human resources representative. You authorize these third-party recipients to receive, possess, use, retain and transfer your Personal Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Personal Data as may be required to a broker or other third party with whom the Corporation may elect to administer the settlement of any award. You understand that Personal Data will be held only as long as is necessary to implement, administer and manage your participation in the Plan and comply with applicable legal requirements.
To the extent provided by your local law, you may, at any time, have the right to request: access to your Personal Data, rectification of your Personal Data, erasure of your Personal Data, restriction of processing of your Personal Data, and portability of your Personal Data. You may also have the right to object, on grounds related to a particular situation, to the processing of your Personal
Award Date: February 22, 2018
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Data, as well as to refuse or withdraw the consents herein, in any case without cost, by contacting in writing your local human resources representative. You understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact your local human resources representative.
Section 11. | No Assurance of Employment; No Right to an Award; Value of Award. |
Nothing contained in the Plan or in this Award Agreement shall confer upon you any right to continue in the employ or other service of the Corporation or constitute any contract (of employment or otherwise) or limit in any way the right of the Corporation to change your compensation or other benefits or to terminate your employment with or without cause. You acknowledge and agree as follows:
(a)the Plan is discretionary in nature and that the Board of Directors may amend, suspend, or terminate it at any time;
(b)the grant of the Award is voluntary and occasional and does not create any contractual or other right to receive future grants of any Awards, or benefits in lieu of any Award even if Awards have been granted repeatedly in the past;
(c)all determinations with respect to such future Awards, if any, including but not limited to the times when Awards shall be granted or when Awards shall vest, will be at the sole discretion of the Committee;
(d)your participation in the Plan is voluntary;
(e)the value of the Award is an extraordinary item of compensation, which is outside the scope of your employment contract (if any), except as may otherwise be explicitly provided in your employment contract;
(f)the Award is not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculating termination, severance, resignation, redundancy, end of service, or similar payments, or bonuses, long-service awards, pension or retirement benefits;
(g)the Award shall expire upon termination of your employment for any reason except as may otherwise be explicitly provided in the Plan and this Award Agreement;
(h)the future value of the Award is unknown and cannot be predicted with certainty; and
(i)no claim or entitlement to compensation or damages arises from the termination of the Award or diminution in value of the Award and you irrevocably release the Corporation from any such claim that may arise.
Section 12. Conflict.
Award Date: February 22, 2018
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In the event of a conflict between this Award Agreement and the Plan, the Plan document shall control.
Section 13. Compliance with Section 409A of the Code.
It is the intent of the Corporation that your Award not be subject to taxation under Section 409A(a)(1) of the Code. Nevertheless, in the event that your Award is or could be subject to Section 409A of the Code, as determined by the Senior Vice President, Human Resources, in consultation with the General Tax Counsel or his or her delegate, the following rules apply: (i) the Award will be interpreted and administered to meet the requirements of Sections 409A(a)(2), (3) and (4) of the Code and thus to be exempt from taxation under Section 409A(a)(1) of the Code; (ii) no Award payment will be made on account of your termination of employment unless the termination of employment constitutes a “separation from service” under Code section 409A(a)(2)(a)(i); and (iii) if you are a “specified employee” within the meaning of Code section 409A, any payment in respect of this Award made on account of a termination of employment will be delayed for six (6) months following such termination of employment, and then made at the earliest date permitted by Section 409A of the Code.
Section 14. Post-Employment Covenants & Stock Ownership Requirements.
Except where prohibited by law, by accepting this Award Agreement as described in Section 18, you agree to the terms of the Post-Employment Conduct Agreement contained in Exhibit A to this Award Agreement and you acknowledge receipt of the Stock Ownership Requirements (“Ownership Requirements”) attached as Exhibit B to this Award Agreement and agree to comply with such Ownership Requirements as amended from time to time. If you are not a Vice President (or above) on February 22, 2018, but you are promoted to Vice President (or above) prior to February 22, 2021, the Ownership Requirements as in effect at that time shall become applicable to you on the date of your promotion to Vice President (or above).
Section 15. English Language.
You have received the terms and conditions of this Award Agreement and any other related communications, and you consent to having received these documents, in English. If you have received this Award Agreement or any other documents related to the Plan translated into a language other than English, and if the translated version is different from the English version, the English version will control.
Quebec Residents Only: The Parties have agreed that this Award Agreement, the Plan as well as any notice, document or instrument relating to them be drawn up in English only. You acknowledge that, upon your reasonable request, the Corporation will provide a French translation of such documents to you. Les parties aux présentes ont convenu que la présente accord, le "Plan," ainsi que tous autres avis, actes ou documents s'y rattachant soient rédigés en anglais seulement. Vous reconnaissez que, à votre demande raisonnable, "the Corporation" fournit une traduction française de ces documents à vous.
Section 16. Currency Exchange Risk.
If your functional currency is not the U.S. dollar, you agree and acknowledge that you will bear any and all risk associated with the exchange or fluctuation of currency associated with the
Award Date: February 22, 2018
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Award (the “Currency Exchange Risk”). You waive and release the Corporation and its subsidiaries from any potential claims arising out of the Currency Exchange Risk.
Section 17. Exchange Control Requirements.
You agree and acknowledge that you will comply with any and all exchange control requirements applicable to the Award and any resulting funds including, without limitation, reporting or repatriation requirements.
Section 18. Electronic Delivery; Acceptance; Execution.
By executing this Award Agreement, you consent to receive copies of the Prospectus applicable to this Award from this internet site (http://www.stockplanconnect.com) as well as to electronic delivery of the Corporation’s annual report on Form 10-K, annual proxy statement and quarterly reports on Form 10-Q. This consent can only be withdrawn by written notice to the Vice President of Compensation and Performance Management at the address noted below. The Corporation may, in its sole discretion, decide to deliver any documents related to the Award under the Plan or future Awards that may be awarded under the Plan by electronic means or request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and agree to participate in the Plan through any on-line or electronic system established and maintained by the Corporation or another third party designated by the Corporation.
No Award is enforceable until you properly acknowledge your acceptance by completing the electronic receipt or returning an executed copy of this Award Agreement to the Vice President of Compensation and Performance Management as soon as possible but in no event later than May 31, 2018. Acceptance of this Award Agreement must be made only by you personally or by a person acting pursuant to a power of attorney in the event of your inability to acknowledge your acceptance (and not by your estate, your spouse or any other person) and constitutes your consent to any action taken under the Plan consistent with its terms with respect to this Award. Notwithstanding the foregoing, this Award will be enforceable and deemed accepted, and will not be forfeited, if you are unable to accept this Award Agreement personally by May 31, 2018, due to your death, disability, incapacity, deployment in the Armed Forces, or similar unforeseen circumstance as determined by the Corporation in its discretion. The Committee has authorized electronic means for the delivery and acceptance of this Award Agreement. If you desire to accept this Award, you must acknowledge your acceptance and receipt of this Award Agreement, either electronically or by signing and returning a copy of this letter on or before May 31, 2018, as follows:
• | Electronic Acceptance: Go to http://www.stockplanconnect.com; or |
• | By Mail: Nick Lossia, Vice President of Compensation and Performance Management, Lockheed Martin Corporation, Mail Point 126, 6801 Rockledge Drive, Bethesda, MD 20817. |
Assuming prompt and proper acknowledgment of this Award Agreement as described in Section 18, this Award will be effective as of the Award Date.
Sincerely,
Award Date: February 22, 2018
Page 16
Patricia L. Lewis
Senior Vice President,
Human Resources
(For written acceptance, please complete, sign, and return by mail.)
By accepting this Award Agreement as described in Section 18, employees located outside of the U.S. are consenting to the processing of Personal Data as described in Section 10.
Signed by:
Signature | Date | |
Print Name | Employee ID | |
Award Date: February 22, 2018
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Appendix A
Capitalized Terms
Average TSR | § 3.2(a) |
Award | 6th ¶ |
Award Date Cash-Based Award Cash Flow | Header Plan § 4.2(a) |
Cash Flow Performance Factor | § 4.2 |
Cash Flow Target Cause Change of Control | § 2.1(c) § 8.2(a) Plan |
Code Committee | Plan 1st ¶ |
Corporation | 6th ¶ |
Divestiture Employee Exchange Act Good Reason Insider | § 5.1(c)(2) Plan Plan § 8.2(b) Plan |
Payable Portion Peer Performance Group | § 5.2(a) § 3.1 |
Performance-Based Award Performance Period | Plan § 1.2 |
Personal Data | § 10 |
Plan | 1st ¶ |
Potential Award | § 2.1(d) |
Retirement Return ROIC | § 5.1(c)(3) § 4.1(a) § 4.1(a) |
ROIC Performance Factor ROIC Target | § 4.1 § 2.1(b) |
Subsidiary | Plan |
Target Award | 6th ¶, § 1.1 |
Total Disability Total Stockholder Return | § 5.1(c)(1) Plan; § 3.2(a) |
Total Stockholder Return Performance Factor | § 3.1; § 3.2 |
Award Date: February 22, 2018
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Exhibit A
Post-Employment Conduct Agreement
(LTIP Grant)
This Post-Employment Conduct Agreement (this “PECA”) attached as Exhibit A to the Award Agreement with an Award Date of February 22, 2018, (the “Award Agreement”) is entered into in consideration of, among other things, the grant of a Long Term Incentive Performance Award to me under the Award Agreement (the “LTIP”) pursuant to the Lockheed Martin Corporation 2011 Incentive Performance Award Plan, as amended (the “Plan”). References to the “Corporation” shall include Lockheed Martin Corporation and its Subsidiaries. By accepting the LTIP, I agree as follows:
1. Protective Covenants.
(a) Covenant Not To Compete – Without the express written consent of the “Required Approver,” during the one-year (or two-year for Elected Officers) period following the date of my termination of employment (the “Termination Date”) with the Corporation, I will not, directly or indirectly, be employed by, provide services to, or advise a “Restricted Company” (as defined in Section 6), whether as an employee, advisor, director, officer, partner or consultant, or in any other position, function or role that, in any such case,
(i) | oversees, controls or affects the design, operation, research, manufacture, marketing, sale or distribution of “Competitive Products or Services” (as defined in Section 6) of or by the Restricted Company, or |
(ii) | would involve a substantial risk that the “Confidential or Proprietary Information” (as defined in Section 1(c)) of the Corporation (including but not limited to technical information or intellectual property, strategic plans, information relating to pricing offered to the Corporation by vendors or suppliers or to prices charged or pricing contemplated to be charged by the Corporation, information relating to employee performance, promotions or identification for promotion, or information relating to the Corporation’s cost base) could be used to the disadvantage of the Corporation. |
Section 1(a)(i) and (ii) shall not apply to residents of California.
To the extent permitted by applicable law, including but not limited to any applicable rules governing attorney conduct (such as the ABA Model Rules of Professional Conduct and state versions thereof), Sections 1(a)(i) and (ii) and Section 1(b) relating to non-solicitation, shall apply to individuals who are employed by the Corporation in an attorney position and whose occupation during the one-year (or two-year, for Elected Officers) period following employment with the Corporation does not include practicing law.
In lieu of Section 1(a)(i) and (ii), as well as Section 1(b) relating to non-solicitation, the following Section 1(a)(iii) shall apply to individuals who are employed by the Corporation in an attorney position, and whose occupation during the one-year (or two-year, for Elected Officers) period following employment with the Corporation includes practicing law.
Award Date: February 22, 2018
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(i) | Post-Employment Activity As a Lawyer – I acknowledge that as counsel to the Corporation, I owe ethical and fiduciary obligations to the Corporation and that at least some of these obligations will continue even after my Termination Date with the Corporation. I agree that after my Termination Date I will comply fully with all applicable ethical and fiduciary obligations that I owe to the Corporation. To the extent permitted by applicable law, including but not limited to any applicable rules governing attorney conduct, I agree that I will not: |
(a) | Represent any client in the same or a substantially related matter in which I represented the Corporation where the client’s interests are materially adverse to the Corporation; or |
(b) | Disclose confidential information relating to my representation of the Corporation, including the disclosure of information that is to the disadvantage of the Corporation, except for information that is or becomes generally known. |
The Corporation’s Senior Vice President, General Counsel, and Corporate Secretary or the General Tax Counsel, as applicable, will determine in his or her discretion whether an individual is employed by the Corporation in an attorney position.
(b) Non-Solicit – Without the express written consent of the Required Approver, during the two-year period following the Termination Date, I will not (i) cause or attempt to cause, directly or indirectly, the complete or partial loss of any contract in effect before the Termination Date between the Corporation and any customer, supplier, distributor or manufacturer of or to the Corporation with which I was responsible, in whole or in part, for soliciting, negotiating, implementing, managing, or overseeing or (ii) induce or attempt to induce, directly or indirectly, any person who is an employee of the Corporation with whom I worked or interacted with within two years prior to the Termination Date to cease employment with the Corporation in order to perform work or services for any entity other than the Corporation.
(c) Protection of Proprietary Information – Except to the extent required by law, following my Termination Date, I will have a continuing obligation to comply with the terms of any non-disclosure or similar agreements that I signed while employed by the Corporation committing to hold confidential the “Confidential or Proprietary Information” (as defined below) of the Corporation or any of its affiliates, subsidiaries, related companies, joint ventures, partnerships, customers, suppliers, partners, contractors or agents, in each case in accordance with the terms of such agreements. I will not use or disclose or allow the use or disclosure by others to any person or entity of Confidential or Proprietary Information of the Corporation or others to which I had access or that I was responsible for creating or overseeing during my employment with the Corporation. In the event I become legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand or otherwise) to disclose any proprietary or confidential information, I will immediately notify the Corporation’s Senior Vice President, General Counsel, and Corporate Secretary as to the existence of the obligation and will cooperate with any reasonable request by the Corporation for assistance in seeking to protect the information. All materials to which I have had access, or which were furnished or otherwise made available to me in connection with my employment with the Corporation shall be and remain the property of the Corporation. For purposes of this PECA, “Confidential or Proprietary Information” means Proprietary Information within the meaning of CRX-015C (a copy of which has been made available to me), including but not limited to information that a person or entity desires to protect from unauthorized disclosure to
Award Date: February 22, 2018
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third parties that can provide the person or entity with a business, technological, or economic advantage over its competitors, or which, if known or used by third parties or if used by the person’s or entity’s employees or agents in an unauthorized manner, might be detrimental to the person’s or entity’s interests. Confidential or Proprietary Information may include, but is not limited to:
(i) | existing and contemplated business, marketing and financial business information such as business plans and methods, marketing information, cost estimates, forecasts, financial data, cost or pricing data, bid and proposal information, customer identification, sources of supply, contemplated product lines, proposed business alliances, and information about customers or competitors, and |
(ii) | existing or contemplated technical information and documentation pertaining to technology, know how, equipment, machines, devices and systems, computer hardware and software, compositions, formulas, products, processes, methods, designs, specifications, mask works, testing or evaluation procedures, manufacturing processes, production techniques, research and development activities, inventions, discoveries, and improvements, and |
(iii) | human resources and personnel information. |
(d) No Disparagement – Following the Termination Date, I will not make any statements, whether verbal or written, that disparage or reasonably may be interpreted to disparage the Corporation or its directors, officers, employees, technology, products or services with respect to any matter whatsoever.
(e) Cooperation in Litigation and Investigations – Following the Termination Date, I will, to the extent reasonably requested, cooperate with the Corporation in any pending or future litigation (including alternative dispute resolution proceedings) or investigations in which the Corporation or any of its subsidiaries or affiliates is a party or is required or requested to provide testimony and regarding which, as a result of my employment with the Corporation, I reasonably could be expected to have knowledge or information relevant to the litigation or investigation. Notwithstanding any other provision of this PECA, nothing in this PECA shall affect my obligation to cooperate with any governmental inquiry or investigation or to give truthful testimony in court.
2. Consideration and Acknowledgement. I acknowledge and agree that the benefits and compensation opportunities being made available to me under the Award Agreement are in addition to the benefits and compensation opportunities that otherwise are or would be available to me in connection with my employment by the Corporation and that the grant of the LTIP is expressly made contingent upon my agreements with the Corporation set forth in this PECA. I acknowledge that the scope and duration of the restrictions in Section 1 are necessary to be effective and are fair and reasonable in light of the value of the benefits and compensation opportunities being made available to me under the Award Agreement. I further acknowledge and agree that as a result of the high level executive and management positions I hold with the Corporation and the access to and extensive knowledge of the Corporation’s Confidential or Proprietary Information, employees, suppliers and customers, these restrictions are reasonably required for the protection of the Corporation’s legitimate business interests.
3. Remedies For Breach of Section 1; Additional Remedies of Clawback and Recoupment.
Award Date: February 22, 2018
Page 21
(a) I agree, upon demand by the Corporation, to forfeit, return or repay to the Corporation the “Benefits and Proceeds” (as defined below) in the event any of the following occur:
(i) | I breach any of the covenants or agreements in Section 1; |
(ii) | The Corporation determines that either (a) my intentional misconduct or gross negligence, or (b) my failure to report another person’s intentional misconduct or gross negligence of which I had knowledge during the period I was employed by the Corporation, contributed to the Corporation having to restate all or a portion of its financial statements filed for any period with the Securities and Exchange Commission; |
(iii) | The Corporation determines that I engaged in fraud, bribery or any other illegal act or that my intentional misconduct or gross negligence (including the failure to report the acts of another person of which I had knowledge during the period I was employed by the Corporation) contributed to another person’s fraud, bribery or other illegal act, which in any such case adversely affected the Corporation’s financial position or reputation; or |
(iv) | Under such other circumstances specified by final regulation issued by the Securities and Exchange Commission entitling the Corporation to recapture or clawback “Benefits and Proceeds” (as defined below). |
(b) The remedy provided in Section 3(a) shall not be the exclusive remedy available to the Corporation for any of the conduct described in Section 3(a) and shall not limit the Corporation from seeking damages or injunctive relief.
(c)For purposes of this Section 3, “Benefits and Proceeds” means (i) to the extent I have earned any of the LTIP, any cash paid to me, whether paid currently or deferred; and (ii) to the extent I have not earned the LTIP fully, all of my remaining rights, title or interest in the LTIP.
4. Injunctive Relief. I acknowledge that the Corporation’s remedies at law may be inadequate to protect the Corporation against any actual or threatened breach of the provisions of Section 1 or the conduct described in Section 3(a), and, therefore, without prejudice to any other rights and remedies otherwise available to the Corporation at law or in equity (including but not limited to, an action under Section 3(a)), the Corporation shall be entitled to injunctive relief in its favor and to specific performance without proof of actual damages and without the requirement of the posting of any bond or similar security.
5. Invalidity; Unenforceability. It is the desire and intent of the parties that the provisions of this PECA shall be enforced to the fullest extent permissible. Accordingly, if any particular provision of this PECA is adjudicated to be invalid or unenforceable, this PECA shall be deemed amended to delete the portion adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of this provision in the particular jurisdiction in which such adjudication is made.
6. Definitions. Capitalized terms not defined in this PECA have the meaning given to them in the Plan, as applicable. For purposes of this PECA, the following terms have the meanings given below:
Award Date: February 22, 2018
Page 22
(a) “Restricted Company” means The Boeing Company, General Dynamics Corporation, Northrop Grumman Corporation, the Raytheon Company, United Technologies Corporation, Honeywell International Inc., BAE Systems Inc., L-3 Communications Corporation, the Harris Corporation, Thales, Airbus Group, Inc., Textron Inc., Finmeccanica SpA, Leidos Holdings, Inc. and (i) any entity directly or indirectly controlling, controlled by, or under common control with any of the foregoing, and (ii) any successor to all or part of the business of any of the foregoing as a result of a merger, reorganization, consolidation, spin-off, split-up, acquisition, divestiture, or similar transaction.
(b) “Competitive Products or Services” means products or services that compete with, or are an alternative or potential alternative to, products sold or services provided by a subsidiary, business area, division or operating unit or business of the Corporation as of the Termination Date and at any time within the two-year period ending on the Termination Date; provided, that, (i) if I had direct responsibility for the business of, or function with respect to, a subsidiary, or for a business area, division or operating unit or business of the Corporation at any time within the two-year period ending on the Termination Date, Competitive Products or Services includes the products so sold or the services so provided during that two-year period by the subsidiary, business area, division or operating unit of the Corporation for which I had responsibility, and (ii) if I did not have direct responsibility for the business of, or function with respect to, a subsidiary, or for a business area, division or operating unit or business of the Corporation at any time within the two-year period ending on the Termination Date, Competitive Products or Services includes the products so sold or the services so provided by a subsidiary, business area, division or operating unit of the Corporation for which I had access (or was required or permitted such access in the performance of my duties or responsibilities with the Corporation) to Confidential or Proprietary Information of the Corporation at any time during the two-year period ending on the Termination Date.
(c) “Required Approver” means:
(i) | with respect to the Chairman, President and Chief Executive Officer, the Management and Development Committee of the Corporation’s Board of Directors; |
(ii) | with respect to an Elected Officer, the Corporation’s Chairman, President and Chief Executive Officer; or |
(iii) | with respect to all other employees, the Senior Vice President, Human Resources of the Corporation. |
(d) “Elected Officer” means an officer of the Corporation who was elected to his or her position by the Corporation’s Board of Directors.
7. Miscellaneous.
(a) The Plan, the Award Agreement (with Exhibit B) and this PECA constitute the entire agreement governing the terms of the award of the LTIP to me.
(b) This PECA shall be governed by Maryland law, without regard to its provisions governing conflicts of law. Any enforcement of, or challenge to, this PECA may only be brought in the United States District Court for the District of Maryland, unless such court determines that it does not have
Award Date: February 22, 2018
Page 23
subject matter jurisdiction, in which case any such enforcement or challenge may be brought in the Circuit Court of Maryland. Both parties consent to the proper jurisdiction and venue of such court, as applicable, for the purpose of enforcing or challenging this PECA.
(c) This PECA shall inure to the benefit of the Corporation’s successors and assigns, and may be assigned by the Corporation without my consent.
(d) This PECA provides for certain obligations on my part following the Termination Date and shall not, by implication or otherwise, affect in any way my obligations to the Corporation during the term of my employment by the Corporation, whether pursuant to written agreements between the Corporation and me, the provisions of applicable Corporate policies that may be adopted from time to time or applicable law or regulation.
This PECA is effective as of the acceptance by me of the award of an LTIP under the Award Agreement and is not contingent on the vesting of the LTIP.
Award Date: February 22, 2018
Page 24
Exhibit B
Stock Ownership Requirements
Lockheed Martin’s Stock Ownership Requirements for Key Employees apply to all senior level positions of Vice President and above. This reflects the expectations of our major stockholders that management demonstrate its confidence in Lockheed Martin through a reasonable level of personal share ownership. This practice is consistent with other major U.S. corporations which link some portion of personal financial interests of key employees with those of shareholders.
Stock Ownership Requirements
Title | Annual Base Pay Multiple |
Chairman, President and Chief Executive Officer | 6 times |
Chief Operating Officer | 5 times |
Chief Financial Officer | 4 times |
Executive Vice Presidents | 3 times |
Senior Vice Presidents | 2 times |
Other Elected Officers | 2 times |
Other Vice Presidents | 1 times |
Satisfaction of Requirements
Covered employees may satisfy their ownership requirements with common stock in these categories:
• | Shares owned directly. |
• | Shares owned by a spouse or a trust. |
• | Shares represented by monies invested in 401(k) Company Common Stock Funds or comparable plans. |
• | Share equivalents as represented by income deferred to the Company Stock Investment Option of the Deferred Management Incentive Compensation Plan (DMICP). |
• | Unvested Restricted Stock Units |
Key employees will be required to achieve the appropriate ownership level within five years and are expected to make continuous progress toward their target. Appointment to a new level will reset the five year requirement. Unexercised options prior to vesting are not counted toward meeting the guidelines.
Holding Period
Covered employees must retain net vested Restricted Stock Units and Performance Stock Units and the net shares resulting from any exercise of stock options if the ownership requirements are not yet satisfied.
Covered employees are asked to report annually on their progress toward attainment of their share ownership goals.
Exhibit 10.4
LOCKHEED MARTIN CORPORATION
AMENDED AND RESTATED
2006 MANAGEMENT INCENTIVE COMPENSATION PLAN
(Performance-Based)
Amended and Restated Effective January 1, 2018
Article I.PURPOSE OF THE PLAN
This Plan is established to provide a further incentive to selected Employees to promote the success of Lockheed Martin Corporation by providing an opportunity to receive additional compensation for performance measured against established goals. The Plan is intended to achieve the following:
1) | Link pay of executive Employees to business performance. |
2) | Incentivize Employees to work individually and as teams to meet objectives and goals consistent with enhancing shareholder value. |
3) | Facilitate the Company’s ability to retain qualified Employees and to attract top executive talent. |
4) | Establish performance goals within the meaning of Section 162(m) of the Internal Revenue Code. |
Article II. DEFINITIONS
Section 2.01 BOARD OF DIRECTORS – The Board of Directors of Lockheed Martin Corporation.
Section 2.02 CASH FLOW – For purposes of Article IV, net cash flow from operations as determined by the Subcommittee at the end of the Plan Year in accordance with generally accepted accounting principles in the United States. Cash Flow shall be determined by the Subcommittee based upon the comparable numbers reported on the Company’s audited consolidated financial statements or, if audited financial statements are not available for the period for which Cash Flow is being determined, the Subcommittee shall determine Cash Flow in a manner consistent with the historical practices used by the Company in determining net cash provided by operating activities as reported in its audited consolidated statement of cash flows. The Subcommittee shall have the right to specify any other adjustment that should be applied in determining Cash Flow that it deems necessary or appropriate to take into account any event recognized under any accounting policy or practice affecting the Company, provided the Subcommittee specifies the adjustment at or prior to the time the organizational performance goals for the Company are reviewed with the Subcommittee, but in no event later than March 30 of the Plan Year.
Section 2.03 CODE – The Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder.
Section 2.04 COMMITTEE – The Management Development & Compensation Committee of the Board of Directors as from time to time appointed or constituted by the Board of Directors.
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Exhibit 10.4
Section 2.05 COMPANY – Lockheed Martin Corporation and those subsidiaries of which it owns directly or indirectly 50% or more of the voting stock or other equity.
Section 2.06 ELECTED OFFICER – An Employee who has been elected as an officer by the Board of Directors.
Section 2.07 EMPLOYEE – Any person who is employed by the Company and who is paid a salary as distinguished from an hourly wage. The term “Employee” includes only those individuals that the Company classifies on its payroll records as Employees and does not include consultants, independent contractors, leased employees, co-op students, interns, temporary or casual employees, individuals paid by a third party or other individuals not classified as an Employee by the Company. Notwithstanding the foregoing, the term “Employee” shall not include any employee who, during any part of such year, was represented by a collective bargaining agent.
Section 2.08 INCENTIVE COMPENSATION – An amount of compensation paid pursuant to this Plan.
Section 2.09 PARTICIPANT – Any Employee selected to participate in the Plan in accordance with Article III.
Section 2.10 PLAN – This Lockheed Martin Corporation Amended and Restated 2006 Management Incentive Compensation Plan (Performance-Based), as amended from time to time.
Section 2.11 PLAN YEAR – A calendar year.
Section 2.12 SUBCOMMITTEE – A subcommittee of the Committee, composed solely of two or more outside directors of the Company (within the meaning of Code Section 162(m)(4)(C)) or the entire Committee if all members of the Committee are outside directors.
Article III. ELIGIBILITY AND PARTICIPATION
The Elected Officers of the Company are eligible to participate in the Plan. An Elected Officer’s participation in the Plan for a Plan Year is subject to the approval of the Committee. Employees who are considered by the Chief Executive Officer to be key Employees of the Company also are eligible to participate in the Plan, subject to the Employee’s selection of and approval by the Chief Executive Officer for participation in a Plan Year. No member of the Committee shall be eligible for participation in the Plan.
Article IV. LIMITATIONS ON INCENTIVE COMPENSATION
Section 4.01 Notwithstanding any other provisions of the Plan that may be to the contrary, Incentive Compensation awards made to Participants who are Elected Officers on the last day of the Plan Year are subject to this Article IV. The limitations on Incentive Compensation set forth in Section 2.02 and this Article IV were approved by the stockholders of Lockheed Martin Corporation at its 2006 Annual Meeting.
ii
Exhibit 10.4
Section 4.02 Incentive Compensation payable under the Plan to (i) the Elected Officer who is the Chief Executive Officer shall not exceed 0.3% of Cash Flow for the Plan Year; and (ii) each of the Participants who are Elected Officers on the last day of the Plan Year, other than the Chief Executive Officer, shall not exceed 0.2% of Cash Flow for the Plan Year. The Subcommittee shall have discretion to determine the conditions, restrictions, or other limitations, in accordance with and subject to the terms of this Plan and Code Section 162(m), on the payment of Incentive Compensation to the Elected Officers. The Subcommittee may reserve the right to reduce the amount payable under this Section 4.02 in accordance with any standards contained in the Plan or on any other basis (including the Subcommittee’s discretion). None of the Subcommittee, the Committee, or the Board of Directors shall have the authority under this Plan to increase the amount payable under this Section 4.02.
Section 4.03 Before authorizing any Incentive Compensation payment under this Plan to a Participant who is an Elected Officer, the Subcommittee must certify in writing (by resolution or otherwise) that the payments are consistent with Section 4.02 of the Plan and that any other material terms under this Plan for payment of Incentive Compensation were satisfied.
Section 4.04 The provisions of Section 2.02 and Article IV shall be interpreted and administered by the Subcommittee in a manner consistent with the requirements for "performance-based compensation" under Code Section 162(m).
Article V. INCENTIVE COMPENSATION PAYMENTS
Section 5.01 Subject to Section 2.02, Article IV and any performance goals (including organizational or enterprise performance goals) established by the Committee or its delegate for the Plan Year (such goals to be established on or before March 30 of the Plan Year), the Committee (or the Committee’s delegate in the case of Participants who are not Elected Officers) shall determine the proposed amount of Incentive Compensation to be paid to each Participant with respect to a Plan Year. Notwithstanding the preceding sentence, in determining the proposed amount of each Participant’s Incentive Compensation award for a Plan Year, the Committee (or the Board of Directors in the case of Participants who are Elected Officers or the Company’s Senior Vice President, Human Resources in the case of Participants who are not Elected Officers) may make an upward (subject to Section 2.02 and Article IV) or downward (including to zero) adjustment of the proposed amount of Incentive Compensation award otherwise payable to the Participant for the Plan Year on the basis of such factors as it deems relevant.
Section 5.02 With respect to a Plan Year, the Committee shall recommend to the Board of Directors the proposed aggregate amount of Incentive Compensation payments to be distributed by the Company to Participants and the proposed amount of Incentive Compensation award to each Participant who is an Elected Officer. The Board of Directors shall review and approve the recommendations of the Committee, or make adjustments to the proposed amounts of Incentive Compensation payable for a Plan Year (on an aggregate level or with respect to a Participant who is an Elected Officer, or both), on the basis of such factors as it deems relevant.
iii
Exhibit 10.4
Section 5.03 The Incentive Compensation amount determined for each Participant with respect to each Plan Year shall be paid to such Participant in cash not later than March 15 following the Plan Year or deferred at the direction of the Committee, but only to the extent permitted under Code Section 409A, until the Participant’s termination of employment. Notwithstanding the foregoing, Participants may also elect to defer payments in accordance with the terms of the Lockheed Martin Corporation Deferred Management Incentive Compensation Plan.
Section 5.04 Before the end of each Plan Year, the Board of Directors may set a minimum aggregate bonus amount that must be used to pay Incentive Compensation awards under this Plan attributable to service during the Plan Year to any combination of Participants who are not Elected Officers of the Company.
Section 5.05 All applicable U.S. Federal, state and local taxes will be withheld from all Incentive Compensation payments made under this Plan.
Article VI. COST OF PLAN
The cost for this Plan is intended to be an allowable expense.
Article VII. RIGHTS OF PARTICIPANTS
Section 7.01 All payments are subject to the discretion of the Board of Directors. No Participant shall have any right to require the Board of Directors to make any appropriation to the Plan for any Plan Year, nor shall any Participant have any vested interest or property right in any share in any amounts which may be appropriated to the Plan.
Section 7.02 This Plan does not constitute an employment agreement of any kind, or a promise of employment for a specific term (including the Plan Year) and does not alter the at will nature of a Participant’s employment with the Company, which may be terminated by the Company or a Participant for any or no reason and without advance notice.
Article VIII. AUTHORITY TO RECOVER PAYMENTS
The Board of Directors retains the authority to make retroactive adjustments to an Incentive Compensation payment made under the Plan on or after January 1, 2008 in accordance with the provisions regarding Recovery of Payments (Claw Back) in Exhibit A.
Article IX. PLAN ADMINISTRATION
The Plan shall be administered under the direction of the Committee. The Committee shall have the right to construe the Plan, to interpret any provision thereof, to make rules and regulations relating to the Plan, and to determine any factual question arising in connection with the Plan's operation after such investigation or hearing as the Committee may deem appropriate. Any decision made by the Committee under the provisions of this Article shall be conclusive and binding on all parties concerned. The Committee may delegate to the officers or Employees of the Company the authority to execute and deliver those instruments and documents, to do all acts and things, and to take all other steps deemed necessary, advisable or convenient for the effective administration of this Plan in accordance with its terms and
iv
Exhibit 10.4
purpose. The rights and obligations of the Committee under this Article IX shall be assumed by the Subcommittee in the case of Participants subject to Article IV.
Article X. AMENDMENT OR TERMINATION OF PLAN
The Board of Directors or its delegate shall have the right to terminate or amend this Plan at any time and to discontinue further payments hereunder.
Article XI. EFFECTIVE DATE
The Plan was first effective with respect to the operations of the Company for the Plan Year beginning January 1, 2006. The Company has further amended and restated the Plan as of the date indicated below, effective January 1, 2018.
LOCKHEED MARTIN CORPORATION:
/s/ Patricia L. Lewis
By: Patricia L. Lewis
Senior Vice President, Human Resources
Date: 2/28/18
v
Exhibit 10.4
Exhibit A
Administrative Provisions
Article I. STANDARD OF CONDUCT AND PERFORMANCE EXPECTATION
It is a prerequisite that before any payment under the Plan can be considered that a Participant will have acted in accordance with the Lockheed Martin Corporation Code of Ethics and Business Conduct and fostered an atmosphere to encourage all employees acting under the Participant’s supervision to perform their duties in accordance with the highest ethical standards. Ethical behavior is imperative. It is also a prerequisite before a payment under a Plan can be considered that a Participant be in good standing with the Company. Thus, in evaluating performance against commitments, a Participant’s adherence to the Company’s ethical standards will be considered paramount in determining awards under the Plan.
Participants whose individual performance is determined to be unacceptable are not eligible to receive Incentive Compensation awards.
Article II. DEFINITIONS
With respect to a Participant, unless otherwise defined in this Article II of Exhibit A, capitalized terms used in this document have the meanings set forth in the Plan.
Section 2.01 DAILY PRO-RATED – The Incentive Compensation award for a Participant who does not work in an eligible position for the entire Plan Year will be pro-rated to the day, i.e., the number of days the Employee is a Participant during the Plan Year divided by the number of days in the Plan Year.
Section 2.02 DISABILITY – Termination of employment as a result of becoming totally disabled as evidenced by commencement of benefits under the Company’s long-term disability plan in which the Participant is enrolled (or, if not a Participant in a Company-sponsored long-term disability plan, under circumstances which would result in the Participant becoming eligible for benefits using the standards set forth in the Company’s long-term disability plan).
Section 2.03 ESP – The Lockheed Martin Corporation Executive Severance Plan, as amended from time to time.
Section 2.04 RETIREMENT – Retirement under the terms of a Company-sponsored pension plan or for Employees who do not participate in a pension plan, termination from employment with the Company following the attainment of age 55 and five years of service or attainment of age 65.
Article III. ELIGIBILITY FOR INCENTIVE COMPENSATION AWARDS
Section 3.01 In general, a Participant must be an Employee on active status or on paid leave of absence on January 1 through December 31 of the Plan Year to be eligible for a full Incentive Compensation award for that Plan Year.
vi
Exhibit 10.4
Section 3.02 Partial, pro-rated Incentive Compensation awards for Participants may be made as provided in this Section 3.02. All pro-rated awards will be Daily Pro-Rated. For purposes of this Section 3.02, active status includes a paid leave of absence.
(a) | Hire during a Plan Year: |
(i) | Participant hired before October 1: Participant is eligible for a pro-rated payment if on active status on December 31 of the Plan Year. |
(ii) | Employee hired on or after October 1: Employee is not eligible for an award under the Plan for the Plan Year. |
(b) | Promotion during a Plan Year: |
(i) | Employee promoted before October 1: Employee is eligible for a pro-rated payment if selected to be a Participant and on active status on December 31 of the Plan Year. |
(ii) | Employee promoted on or after October 1: Employee is not eligible for an award under the Plan for the Plan Year. |
(c) | Downlevel during a Plan Year: |
(i) | Participant downleveled before October 1: Participant is eligible for a pro-rated award if on active status on December 31 of the Plan Year. |
(ii) | Participant downleveled on or after October 1: Participant is eligible for a full award if he or she was a Participant on January 1 of the Plan Year and continues to be an Employee on active status on December 31 of the Plan Year. |
(d) | Voluntary termination during the Plan Year: A Participant is not eligible for an award if he or she voluntarily terminates employment, other than on account of Retirement, during the Plan Year. |
(e) | Lay Off during a Plan Year: |
(i) | Non-ESP-Eligible Participants: A Participant who does not receive a payment under the ESP may be considered for a pro-rated award in the Company’s discretion if the Participant has a minimum of six (6) months as an active Employee during the Plan Year. The pro-rated award will be based on a payment made “At Target.” |
(ii) | ESP-Eligible Participants: A Participant who receives any payment under the ESP, regardless of whether the Participant receives a supplemental payment under the ESP, is not eligible to receive an award under the Plan with respect to the Plan Year in which the layoff occurs (even if the layoff occurs on the last day of the Plan Year). |
vii
Exhibit 10.4
(f) | Retirement during a Plan Year: A Participant who terminates employment with the Company on account of Retirement during a Plan Year may be considered for a pro-rated award in the Company’s discretion if the Participant has a minimum of six (6) full months as an active Employee during the Plan Year. The pro-rated award will be based on year-end performance results. |
(g) | Disability or death during a Plan Year: A Participant who terminates employment with the Company on account of Disability or death during a Plan Year may be considered for a pro-rated award in the Company’s discretion if the Participant has a minimum of three (3) full months as an active Employee during the Plan Year. The pro-rated award will be based on a payment made “At Target.” |
(h) | Unpaid leave of absence during a Plan Year: A Participant who is on an unpaid leave of absence for more than three (3) months during a Plan Year may be considered for a pro-rated award in the Company’s discretion if the Participant has a minimum of three (3) full months as an active Employee during the Plan Year. |
(i) | Termination for cause during a Plan Year: A Participant who is terminated for cause during the Plan Year is not eligible for an award under the Plan. |
Section 3.03 An Incentive Compensation award for a Participant whose target level and/or award formula changes during the Plan Year will be pro-rated to the day, i.e., the number of days during which the original level and/or formula applied to the Participant divided by the number of days in the Plan Year, and the number of days during which the new level and/or formula applied to the Participant divided by the number of days in the Plan Year.
Article IV. RECOVERY OF PAYMENTS (CLAW BACK)
Section 4.01 The Board of Directors retains the authority to make retroactive adjustments to a payment made under the Plan on or after January 1, 2008 under the following circumstances and such other circumstances as may be specified by final regulation issued by the Securities and Exchange Commission entitling the Company to recapture or claw back amounts paid pursuant to the Plan:
(a) | If the Board of Directors determines, after consideration of all the facts and circumstances that the Board of Directors in its sole discretion considers relevant, that either (i) the intentional misconduct or gross negligence of an Elected Officer, or (ii) the failure of an Elected Officer to report another person’s intentional misconduct or gross negligence of which the Elected Officer had knowledge, contributed to the Company having to restate all or a portion of its financial statements filed with the Securities and Exchange Commission, then the Board of Directors may require the Elected Officer to repay to the Company the value of any payment under the Plan as determined by the Board of Directors. |
(b) | If the Board of Directors determines, after consideration of all the facts and circumstances that the Board of Directors in its sole discretion considers relevant, that an Elected Officer either (i) engaged in fraud, bribery or other illegal act, or (ii) the Elected Officer’s intentional misconduct or gross negligence (including the failure by the |
viii
Exhibit 10.4
Elected Officer to report the acts of another person of which the Elected Officer had knowledge) contributed to another person’s fraud, bribery or other illegal act, which in either case adversely impacted the Company’s financial position or reputation, the Board of Directors may require the Elected Officer to repay to the Company the value of any payment under the Plan as determined by the Board of Directors.
To the extent permissible under applicable law, the Board of Directors may delegate its authority to make determinations under this Article IV to the Committee.
ix
Exhibit 10.4
ADDENDUM I
PROVISIONS APPLICABLE TO EMPLOYEES OF LM AUSTRALIA
MODIFICATIONS TO THE PLAN AND EXHIBIT A
MODIFICATIONS TO THE PLAN
All references to Code section 409A are inapplicable to Employees who are employed by LM Australia. Payments under the Plan will be taxed as income under local rules and subject to superannuation and any other applicable deductions required by law or regulation.
With respect to Employees employed by LM Australia, Section 2.07 is revised in its entirety as follows:
EMPLOYEE –The term “Employee” includes only those individuals that the Company classifies on its payroll records as Employees and does not include consultants, independent contractors, interns, volunteers, temporary or casual employees, individuals paid by a third party or other individuals not classified as an Employee by the Company.
MODIFICATIONS TO EXHIBIT A
In Section 3.02(e), the references to “layoff” or to being “laid off” mean “redundancy” or being “made redundant”.
With respect to Employees employed by LM Australia, Section 3.02(h) is revised in its entirety as follows:
Unpaid leave of absence during a Plan Year: A Participant who is on an approved unpaid leave of absence for more than three (3) months during a Plan Year may be considered for a pro-rated award in the Company’s discretion. If such Participant has a minimum of three (3) full months as an active Employee during the Plan Year, such pro-rated award will be based on the Participant’s actual performance rating for such Plan Year. If such Participant has less than three (3) full months as an active Employee during the Plan Year, such pro-rated award will be based on a payment made “At Target.”
ACKNOWLEDGEMENT AND DISCRETION
This Plan does not form part of any contract between a Participant and the Company. Any reference to obligations or requirements of the Company in this Plan is not intended to give rise to contractual obligations binding on the Company.
Any payment made to a Participant under this Plan does not form part of a Participant's annual salary for any purpose, including leave entitlements, notice and severance payments, unless otherwise provided by legislation.
REVIEW
This Plan, as it applies to Employees who are employed by LM Australia, shall be reviewed on an annual basis.
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Exhibit 10.4
ADDENDUM II
PROVISIONS APPLICABLE TO EMPLOYEES OF LM UK
MODIFICATIONS TO THE PLAN
All references to the Internal Revenue Code are inapplicable to Employees who are employed by LM UK.
With respect to Employees employed by LM UK, Section 2.07 is revised in its entirety as follows:
EMPLOYEE – Any person who is employed by the Company or who would otherwise be entitled to the same basic working and employment conditions as an employee in terms of pay. Except where entitled by law to the same basic working and employment conditions as an employee in terms of pay this does not include consultants, independent contractors, students, interns, temporary or casual employees, zero hours workers or other individuals not classified by the Company as its employees.
With respect to Employees employed by LM UK, Section 5.03 is revised in its entirety as follows:
Incentive Compensation payments under the Plan will be paid to each Participant through payroll not later than March 30 following the Plan Year.
With respect to Employees employed by LM UK, Section 5.05 is revised in its entirety as follows:
All Incentive Compensation payments made under the Plan shall be non-pensionable and shall be subject to PAYE and National Insurance and any other applicable deductions through the payroll. This does not affect the Employee’s ability to make additional voluntary pension contributions.
With respect to Employees employed by LM UK, Section 7.02 is revised in its entirety as follows:
This Plan does not form a part of the Participant’s contract of employment, or constitute an employment agreement or benefit of any kind, or a promise of employment for a specific term (including the Plan Year) and does not alter the nature of a Participant’s employment with the Company, which may be terminated by the Company or a Participant in accordance with its terms.
MODIFICATIONS TO EXHIBIT A
The following is added to the end of the second paragraph of Article I:
In addition to any other requirements set forth in the Plan with respect to receipt of payments under the Plan, Participants who are employed by LM UK may not be eligible to receive payment if, on the date of payment, they are subject to the Company’s disciplinary procedure or a performance improvement plan or are under notice of termination of employment.
With respect to Employees employed by LM UK, Section 2.02 is revised in its entirety as follows:
LTD BENEFITS – The payments that are made under the Company’s long-term disability plan.
i
Exhibit 10.4
With respect to Employees employed by LM UK, Section 2.04 is revised in its entirety as follows:
RETIREMENT – Retirement under the terms of a Company-sponsored pension plan or, for Employees who do not participate in a pension plan, termination from employment with the Company following the attainment of age 55.
With respect to Employees employed by LM UK, Section 3.01 is revised in its entirety as follows:
In general, a Participant must be an Employee on active status or on paid leave of absence on January 1 through December 31 of the Plan Year to be eligible for a full Incentive Compensation award for that Plan Year. For purposes of the foregoing: (a) an Employee will not be eligible for an Incentive Compensation award with respect to any period of paid leave of absence in excess of 26 weeks (regardless of whether the paid leave of absence began prior to the current Plan Year); and (b) Employees in receipt of LTD Payments will not be considered on active status or on paid leave of absence.
With respect to Employees employed by LM UK, Section 3.02(e) is revised in its entirety as follows:
Termination due to Redundancy during a Plan Year: A Participant who terminates employment with the Company on account of redundancy during a Plan Year may be considered for a pro-rated award in the Company’s discretion if the Participant has a minimum of six (6) months as an active Employee during the Plan Year. The pro-rated award will be based on a payment made “At Target.”
With respect to Employees employed by LM UK, Section 3.02(g) is revised in its entirety as follows:
Death during a Plan Year: A Participant who either terminates employment with the Company or has his or her employment terminated on account of death during a Plan Year may be considered for a pro-rated award at the Company’s discretion if the Participant has a minimum of three (3) full months as an active Employee during the Plan Year. The pro-rated award will be based on a payment made “At Target.”
With respect to Employees employed by LM UK, Section 3.02(h) is revised in its entirety as follows:
Unpaid leave of absence during a Plan Year: A Participant who is on an approved unpaid leave of absence for more than three (3) months during a Plan Year may be considered for a pro-rated award in the Company’s discretion. If such Participant has a minimum of three (3) full months as an active Employee during the Plan Year, such pro-rated award will be based on the Participant’s actual performance rating for such Plan Year. If such Participant has less than three (3) full months as an active Employee during the Plan Year, such pro-rated award will be based on a payment made “At Target.”
With respect to Employees employed by LM UK, new Section 3.02(j) is added as follows:
LTD Payments during a Plan Year: A Participant is not eligible for an Incentive Compensation award with respect to any part of a Plan Year for which he or she is receiving LTD Payments but will receive a pro-rated award for the remainder of the year that they are on active service. Where no performance rating has been recorded, the individual component of the pro-rated award will be based on a payment made “At Target”.
ii
Exhibit 10.4
With respect to Employees employed by LM UK, new Section 4.02 is added as follows:
Any Participant receiving a payment does so on the understanding that it is made on the understanding that the Participant has not acted in the manner referred to in Section 4.01 and that the Participant received the payment subject to the provisions of Section 4.01. Where the provision of Section 4.01 apply the payment shall be recoverable as a debt due from the Participant to the Company.
iii
Exhibit 15
Acknowledgment of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Lockheed Martin Corporation
We are aware of the incorporation by reference of our report dated April 25, 2018, relating to the unaudited consolidated interim financial statements of Lockheed Martin Corporation that is included in its Form 10-Q for the quarter ended March 25, 2018, in the following Registration Statements of Lockheed Martin Corporation:
• | 33-63155 on Form S-8, dated October 3, 1995; |
• | 33-58083 on Form S-8 (Post-Effective Amendment No. 1), dated January 22, 1997; |
• | 333-20117 and 333-20139 on Form S-8, each dated January 22, 1997; |
• | 333-27309 on Form S-8, dated May 16, 1997; |
• | 333-37069 on Form S-8, dated October 2, 1997; |
• | 333-40997 on Form S-8, dated November 25, 1997; |
• | 333-58069 on Form S-8, dated June 30, 1998; |
• | 333-92197 on Form S-8, dated December 6, 1999; |
• | 333-92363 on Form S-8, dated December 8, 1999; |
• | 333-78279 on Form S-8 (Post-Effective Amendments No. 2 and 3), each dated August 3, 2000; |
• | 333-56926 on Form S-8, dated March 12, 2001; |
• | 333-105118 on Form S-8, dated May 9, 2003; |
• | 333-113769, 333-113770, 333-113771, 333-113772, and 333-113773 on Form S-8, each dated March 19, 2004; |
• | 333-115357 on Form S-8, dated May 10, 2004; |
• | 333-127084 on Form S-8, dated August 1, 2005; |
• | 333-146963 on Form S-8, dated October 26, 2007; |
• | 333-155687 on Form S-8, dated November 25, 2008; |
• | 333-162716 on Form S-8, dated October 28, 2009; |
• | 333-155684 on Form S-8 (Post-Effective Amendment No. 1), dated August 23, 2011; |
• | 333-176440 on Form S-8, dated August 23, 2011; |
• | 333-188118 on Form S-8, dated April 25, 2013; |
• | 333-195466 on Form S-8, dated April 24, 2014 and July 23, 2014 (Post-Effective Amendment No.1); |
• | 333-219373 on Form S-3, dated July 20, 2017; and |
• | 333-219374 on Form S-3, dated July 20, 2017. |
/s/ Ernst & Young LLP
Tysons, Virginia
April 25, 2018
Exhibit 31.1
CERTIFICATION OF MARILLYN A. HEWSON PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Marillyn A. Hewson, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Lockheed Martin Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ Marillyn A. Hewson | |||
Marillyn A. Hewson | |||
Chief Executive Officer | |||
Date: April 25, 2018 | |||
Exhibit 31.2
CERTIFICATION OF BRUCE L. TANNER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce L. Tanner, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Lockheed Martin Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ Bruce L. Tanner | |||
Bruce L. Tanner | |||
Chief Financial Officer | |||
Date: April 25, 2018 | |||
Exhibit 32
CERTIFICATION OF MARILLYN A. HEWSON AND BRUCE L. TANNER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Lockheed Martin Corporation (the “Corporation”) on Form 10-Q for the quarter ended March 25, 2018, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I, Marillyn A. Hewson, Chief Executive Officer of the Corporation, and I, Bruce L. Tanner, Chief Financial Officer of the Corporation, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. |
/s/ Marillyn A. Hewson | ||||
Marillyn A. Hewson | ||||
Chief Executive Officer | ||||
/s/ Bruce L. Tanner | ||||
Bruce L. Tanner | ||||
Chief Financial Officer | ||||
Date: April 25, 2018 | ||||